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Off-Balance Sheet (OBS)

Candlefocus Editor

Off-balance sheet (OBS) items are a commonly used accounting tool employed to facilitate and manage financial statements. They are a type of transaction or asset that a company does not record on its balance sheet, despite the fact that they can be assets and liabilities. OBS items are often measured and documented in the form of contractual agreements between the company and the party with whom it enters a transaction.

One of the primary benefits associated with OBS items is that they can be used to reduce a company’s reported debt-to-equity ratio (D/E) and leverage, cutting the cost associated with borrowing money and maintaining covenant restraints with financing creditors. OBS items allow companies to obscure their true financial values, preventing bond covenants from being breached and avoiding the downside consequences of increasing debt levels.

Despite their popularity and advantages, OBS items have come under increased scrutiny in the wake of numerous accounting scandals. Companies have been accused of mis-using off-balance sheet items to manipulate financial statements, creating an artificial picture of their solvency and misffing bond holders and other creditors. The UK Financial Reporting Council now requires companies to disclose more information about off-balance sheet transactions and prohibits the use of uninsured or unguaranteed structures as a means of off-balance sheet financing.

In conclusion, off-balance sheet items are a type of asset or liability that does not appear on the balance sheet. OBS items can be used to reduce the cost of financing and to keep debt levels in check, but should be used cautiously in light of increasing regulation and the potential for abuse. Companies should be mindful of their off-balance sheet exposures and ensure full disclosure to creditors and investors.

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