What is off-balance-sheet financing? Why might a company be interested in using off-balance-sheet financing?
Off-balance-sheet financing is an attempt to borrow monies in such a way that the obligations are not recorded. Reasons for off-balance sheet financing are:
(1) Many believe removing debt enhances the quality of the balance sheet and permits credit to be obtained more readily and at less cost.
(2) Loan covenants are less likely to be violated.
(3) The asset side of the balance sheet is understated because fair value is not used for many assets. As a result, not reporting certain debt transactions offsets the nonrecognition of fair values on certain assets.
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