Off-Balance Sheet Assets and Liabilities
The term off-balance sheet can refer to assets or liabilities that are not on a company's balance sheet. These off-balance sheet assets and liabilities must be carefully evaluated by both buyers and sellers when determining, the value of a business and its most likely selling price.
An example of an off-balance sheet asset would be accounts under management such as property management accounts that earn recurring fees, but where the managed assets are owned by other parties. The income generated by such accounts have value and can be sold.
An example of an off-balance sheet liability would be an equipment lease where the company has an obligation to pay a monthly fee but has not signed a note payable.
Off-balance sheet assets and liabilities should be footnotes to company financial statements but are sometimes omitted.
Off-balance sheet financing refers to an accounting practice that depends upon the existence of off-balance sheet assets, including off-balance sheet entities that borrow money or lease assets. It involves keeping the off-balance sheet debts or leases off the balance sheet of the company employing the practice so they can keep their debt-to-equity and leverage ratios low. This results in a stronger-looking balance sheet and lower borrowing costs.
Off-balance sheet financing may be illegal if it is used to hide financial irregularities from investors, creditors, and regulators. With proper disclosures, the practice is legal. It is estimated that over 80% of leases are not reported on balance sheets as liabilities.
There is no substitute for getting advice from an attorney or Certified Public Accountant if you are considering off-balance sheet financing.
Hidden values may be off-balance sheet items or balance sheet items whose market value may not be reflected in a company's share price. These assets may be land or equipment depreciated to book value.