Off-Balance-Sheet Financing Definition

Off-Balance-Sheet Financing

http://www.investopedia.com/terms/o/obsf.asp

What Does Off-Balance-Sheet Financing Mean?
Aform of financing in which large capital expenditures are kept off of acompany's balance sheet through various classification methods.Companies will often use off-balance-sheet financing to keep their debtto equity (D/E) and leverage ratios low, especially if the inclusion of alarge expenditure would break negative debt covenants.

Investopedia explains Off-Balance-Sheet Financing
Contrastto loans, debt and equity, which do appear on the balance sheet.Examples of off-balance-sheet financing include joint ventures, researchand development partnerships, and operating leases (rather thanpurchases of capital equipment).

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

This term came intopopular use during the Enron bankruptcy. Many of the energy traders'problems stemmed from setting up inappropriate off-balance-sheetentities.