In certain circumstances this can have a flattering effect on important accounting ratios such as leverage and return on assets.
OBS components can be daughter companies, new ventures or letters of credit. However, this can be abused if companies use OBS regulation to hide critical liabilities. It is important to look at OBS components in the footnotes of a financial report to gain a clear picture of a company's liabilities.
Off Balance Sheet Components All companies must take on a level of risk in order to grow. Running a business in itself is a risk, and the risks get larger the bigger the business becomes.
Successful businesses must take on new ventures in order to grow employee salaries and shareholder wealth. When they do this, they know there is a risk of failure, and they do not want to compromise their successful core business.
As a result, they may form a subsidiary to take on the risk. If the risk fails to pay off, the subsidiary can declare bankruptcy without affecting the parent company's business. Types of Components Consider a magazine publishing company that would like to try its hand in television.
The publicly traded company already has a large profit base, and it knows the new venture could be a great success or a great failure. In order to keep itself safe in this endeavor, it forms a child company to take on the television opportunity. This child company may be deeply in debt, and that debt is not reported on the parent company's balance sheet.
If the television venture fails, the child declares bankruptcy. The parent company pays the legal fees for the bankruptcy and other costs, but it does not have the bankruptcy on its record.
Where to Components Companies must list off balance sheet components in the footnotes of their financial reports. You will also find outstanding liabilities or assets in this section. All OBS components should also be listed, but GAAP is not as clear about what is mandatory in terms of footnotes, so companies do take liberties here.
Evaluating Components OBS components have a bad reputation since they were abused by companies like Enron. OBS components, including operating leases, debt obligations and securitizations, all present significant risk to shareholders in a parent company.
However, just having OBS components is not a bad thing. It is up to you to determine what risks the OBS components present to the bottom line for the parent company. You may also consider whether the risk is a viable undertaking or if it is too large for the potential payoff.
Only an investor can make this decision; analysts may help in providing you with the data. Only at Scottrade Related Articles.A contra account is an account with a balance opposite the normal accounts in its category. Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
2 ABSTRACT Changes in accounting requirements made in response to the financial crisis of have made achieving off-balance-sheet treatment for .
Off-balance sheet treatment will no longer be an option for sale and leaseback transactions.
IASB and FASB: Accord, Then Divergence The International Accounting Standards Board, which worked with FASB jointly on leases for some nine years, issued its own set of lease accounting rules in January. Off-balance sheet (OBS) items is a term for assets or liabilities that do not appear on a company's balance sheet.
Although not recorded on the balance sheet, they are still assets and liabilities of . Journal of Accounting, Auditing, & Finance (, Spring), pp.
Elfrink and Anthony, , June J.A. Elfrink, J.A. Anthony SFAS 94 amends consolidation principles to reduce off balance sheet . Off-Balance Sheet Accounting: How it Works If an individual wants to protect his personal assets from a risky business venture, he can create a corporation.