I remember covering this in grad school (due to Enron), but I don't really remember much about the actual use of Off Balance Sheet Entities. So my question to you smart monkeys is what are examples of Off Balance Sheet Accounting?
What I can think of: - Structuring leases to be Operating Leases instead of capital. This keeps the required payments off the balance sheet, but I believe it does require disclosure in the financial statements. While this seems like this could be effective on your debt ratios, I would assume this would be negated by this disclosure.
Securitizing your receivables. When this happens I believe the original company essentially becomes a pass through and doesn't show the future receivables or obligations it's bound to.
Taking minority interest in certain facilities. This way the debt isn't shown on the parent's BS, but obviously they don't get to see all of the profits.
What am I missing here? I'm generally thinking outside of financial institutions. Other than the second example above how can a manufacturing company truly mislead investors using off balance sheet accounting (assuming the investor reads the disclosures).
Using equity method instead of consolidating the financial statements somehow could present a better position in terms of ratios as the net effect is added in spite of whole assets and other accounts. For manufacturing firms estimates and degree of conservatism might lead to wrong inferences. Other then that the economic value of employee compensation, the servicing costs, interest costs assumptions regarding to compensation, salary growth, discount rate used, planned obligations could also result in such sort of things.
I'll give you another scenario: Netflix.
Netflix has off-balance sheet liabilities for its long-term streaming content deals (which sometimes cannot be precisely valued).
Basically the firm signs very expensive, multi-year deals with content providers for exclusive access to streaming content. These deals are often based on the number of expected "views", ie they are variable cost deals that get more expensive based on how many people watch them. Many times, these off-balance sheet items are for shows that haven't even been filmed yet, but to which NFLX owns the rights (eg: 2015 series of Mad Men, how many times will it be streamed...tough to precisely answer that question when the show hasn't even been written)
At the moment, NFLX has about $1.1B worth of off-balance sheet liabilities representing future payments to content owners like Warner Bros.
I should clarify that most of Netflix's liabilities are on-balance sheet. It's just a portion that cannot be precisely valued which are not included.
The third example is pretty difficult to use for off-balance sheet accounting since Enron due to VIE rules. I would expand and look further into the second point as there are number of ways to use the working capital part of your B/S to essentially increase your cash position - for a period of time, at a cost - without disclosing it as "debt". It's not so much that this wouldn't be on your balance sheet but that financing would essentially sit somewhere else and overlooked for the sake of ratio and leverage considerations.
Corrupti occaecati quia et inventore porro distinctio et. Quos vel est quas et neque et qui.
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