Off-Balance Sheet Assets

Follow us on LinkedIn

Companies have several financial statements that report various aspects of their business. Among these, the balance sheet presents the assets and liabilities balances that companies own or owe. However, these do not contain all of those assets or liabilities. It is because some of these items may remain off the balance sheet. Off-balance sheet accounting has long been a debate topic for most experts.

What is an Off-Balance Sheet?

Off-balance sheet represents items that do not appear on a company’s balance sheet. It may include both assets and liabilities. However, that does not mean that companies don’t own these. Instead, some accounting standard provisions may disallow these companies from reporting them. In some cases, companies may also use it adversely and structure their assets and liabilities to stay off the balance sheet.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

Off-balance sheet accounting, while permissible, can also lead to some problems. For a company’s stakeholders, off-balance-sheet accounting can cause incorrect decision-making. In some cases, assets and liabilities may miss the definition set by the contextual frameworks. Therefore, companies cannot disclose them. However, some companies may deliberately choose to keep items off-balance sheets to mask their financial health.

What are Off-Balance Sheet Assets?

Off-balance sheet assets are resources that companies may remove from their balance sheet. Despite them not appearing on the balance sheet, it does not imply that companies don’t own these assets. Companies may hold these assets, whether tangible or intangible, but not report them on their balance sheet. Some companies may use it to their advantage and remove any assets that may have an adverse effect on their balance sheets.

According to the contextual framework, assets are resources that companies own or control and result in future economic inflows. Any item that does not meet the definition cannot be a part of the balance sheet. There are some items that may not meet this definition. Therefore, it may give rise to off-balance-sheet assets that companies do not report.

As mentioned, however, some companies may use it to benefit or mask their accounts. They may structure their assets, so they don’t meet the definition and stay off their balance sheet. Inherently, off-balance sheet items are not deceptive in nature. However, companies may use them with the wrong intent, making them a problem for their stakeholders.

An example of a company using off-balance-sheet assets is Enron. The company worked on assets and immediately claimed the projected profits from it. If the actual profits were lower than anticipated, it would remove the asset from the balance sheet.

What are the types of Off-Balance Sheet Assets?

There are various types of off-balance sheet assets that companies may keep away from their balance sheet. These include the following.

Accounts Receivables

With accounts receivable balances, companies have the option to outsource their collection using a factoring company. Once they do so, they can remove the accounts receivable balance from their balance sheet. This way, they can outsource their default risk while also keeping the asset off their balance sheet.

Operating leases

Operating leases come with an underlying asset that companies can use. However, their accounting treatment may require companies not to report the leased asset and the associated liability. In that case, companies only report the rent payments while keeping the asset away from the balance sheet.

Conclusion

Off-balance sheet items include any assets or liabilities that do not appear on a company’s balance sheet. Off-balance assets are resources that a company may own but not report on its balance sheet. While the requirement to avoid including them may come to accounting standards, some companies may also use it adversely.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSFINEOS Brings Proven Absence Management Solution to the Employer Market
FINEOS Brings Proven Absence Management Solution to the Employer Market

FINEOS Absence for Employers provides employers access to an extensive and powerful purpose-built absence management solution that already supports 30 million employees across North America ATLANTA — FINEOS today announced the availability of FINEOS Absence for Employers, a robust absence and disability management solution offered…

Stay up-to-date with the latest news - click here
LATEST NEWSADVISORY: B.C. Forestry Unions to Hold Joint Forest Workers Summit in Victoria
ADVISORY: B.C. Forestry Unions to Hold Joint Forest Workers Summit in Victoria

VICTORIA, British Columbia — While communities across the province are grappling with the aftermath of mill closures, fibre supply shortages, issues related to old growth, and more, B.C.’s three major forestry unions are joining together to hold an unprecedented summit on Tuesday in Victoria. The…

Stay up-to-date with the latest news - click here
LATEST NEWSRupert Resources Confirms Transaction Discussions With B2Gold Relating to Purchase of 70% Interest in Joint Venture Between B2Gold and Aurion Resources
Rupert Resources Confirms Transaction Discussions With B2Gold Relating to Purchase of 70% Interest in Joint Venture Between B2Gold and Aurion Resources

TORONTO — In response to the announcement today by Aurion Resources Inc. (“Aurion”), Rupert Resources Ltd. (TSX: RUP) (the “Company”) today confirmed that it is in preliminary discussions with B2Gold Corporation (“B2Gold”) regarding the potential purchase of B2Gold’s 70% interest in a joint venture between…

Stay up-to-date with the latest news - click here
LATEST NEWSMilu Health Announces $4.8M Seed Round Led by a16z Bio + Health and Partners with Employers to Expand Employee Access to AI-driven Health Savings Platform
Milu Health Announces $4.8M Seed Round Led by a16z Bio + Health and Partners with Employers to Expand Employee Access to AI-driven Health Savings Platform

The company’s platform identifies where patients can save money on health costs by finding fairly priced doctors, accessing affordable medications, fighting incorrect medical bills, and routing employer benefits NEW YORK — Milu Health, a health tech company that uses AI to drive cost savings in…

Stay up-to-date with the latest news - click here
LATEST NEWSAlphawave Semi Demonstrates 3nm Silicon-Proven 24Gbps Universal Chiplet ExpressTM (UCIeTM) Subsystem for High-Performance AI Infrastructure
Alphawave Semi Demonstrates 3nm Silicon-Proven 24Gbps Universal Chiplet ExpressTM (UCIeTM) Subsystem for High-Performance AI Infrastructure

Successful silicon bring-up extends leadership in chiplet-enabled silicon solutions to accelerate AI connectivity and compute LONDON & TORONTO — Alphawave Semi (LSE: AWE), a global leader in high-speed connectivity and compute solutions for the world’s technology infrastructure, today announced the successful bring-up of its first…

Stay up-to-date with the latest news - click here

Leave a Reply