Off Balance Sheet Financing

Formal

The method of acquiring the use of an asset without it being included as an ‘owned’ asset on the Balance Sheet. Rules detailing how this is included are outlined in a document called FRS 17. It is very important that companies tell the public, investors, and staff how much capital, or assets are utilised to generate profits. This allows an appreciation of company profitability relative to the funds needed to generate such profits.

Real-world Example

A company structures an equipment rental so it doesn't have to be listed as a liability on its balance sheet, keeping reported debt levels lower - off balance sheet financing, though accounting rules have tightened what qualifies for this treatment.