Off Balance Sheet Financing Practices

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Off Balance Sheet Financing Practices [Student Name] [Course Title] [Instructor Name] [Date] Off Balance Sheet Financing Practices The traditional accounting methods have been replaced by a number of new accounting techniques. Some of which are observable while other remain hidden. Off Balance Sheet Financing or OBSF is one of these new accounting techniques. It is a mode of obtaining finance for a business without disclosing significant capital expenditures on the balance sheet of a company by means of using different ways of classifying such expenses. OBSF is most of the times used by business enterprises to maintain their leverage or gearing positions in such a way which would not have any negative implications on the company.…show more content…
In addition, these expectations pose pressure on the management to find ways which may result in better presentation of the financial statements and improved earnings (Boot and Thakor 1991). The Banking sector in particular and other sectors in general are mostly seen following this approach. As for instance, there has been observed a trend of investing in such portfolios and instruments which are regarded as high risk investments. But the intention behind this is to improve or strictly stating ‘inflate’ the earnings of an enterprise without having regard to the riskiness of such investment decisions and the fact that the stakeholders of the business need justification of such improvements in the performance in the form of financial statements disclosures. For the purposes of obtaining security on the risky investments, corporations tend to enter into complex third party arrangements which cannot be disclosed in the financial statements. Apart from this, one other motivating factor which is regarded as the major reason behind this approach of management is that they have their own interests and objectives. As for instance, managers are better off in their performance appraisals when the company is showing profits consistently (Boone and Raman 2001). The practices of off balance sheet financing and accounting, as stated earlier, comprise of operating leases, joint venture and collaborations with respect to R&D. Among these options,
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