Here is Some Important Information about Off-Balance Sheet by Experts
The assets or liabilities of a company that do not appear on the balance sheet of a particular company is basically referred to as off-balance sheet. Though they do not appear on the company’s balance sheet but yet they are important parts of the company.
In most cases, you will see that if a company is not the legal owner of certain assets or liabilities,then those become a part of the off-balance sheet.
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Off-Balance sheets and its relevance
These sheets are extremely important in order to understand the financial health of a particular company. It is especially important for the investors. At times it becomes a little difficult to identify the off-balance sheet because it is just mentioned as a small note at the end of the company balance sheet.
There are some companies who make misleading off balance sheets. However but these off balance sheets necessarily need not be false. There are some companies who do keep proper balance sheet items. For example, if you have an investment firm then you have to keep the record of assets and investments of your clients in your off balance sheet.
These sheets are also used in order to understand the risks associated with assets and liabilities of a particular company especially in case of those projects that are handled by two different companies.
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Role of off-balance sheets in financing
One of the most common examples of an off-balance sheet item is an operating lease. If a particular company already has a proper established line of credit with a particular bank then in such cases the only way by which a company can extend the credit is by keeping the debt to assets ratio below a definite level.
If the company has to purchase computer systems therefore then it again has to take credit which would hamper debt to asset ratio.
So in such cases company takes help of special purpose entity where in company purchases computer hardware from a particular company and then leases it to the same company by means of an operating lease. In this case, a company is allowed to make use of some equipment, but legal ownership is with some other company.
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