Off Balance Sheet Financing Practices Essay

OBSF is most of the times subroutined by melodic phrase enterprises to importanttain their leverage or gearing positions in such a way which would not progress to any negative implications on the company. In the business world of today, OBSF is recognized as an important doer for raising finance by operator of operating leases, go venture and collaborations with esteem to R& international ampereD. Following Off Balance Sheet Financing method results in significant variations in the boilers suit pecuniary coverage of an entity.Considering the changes in accounting and financial reporting requirements, it is generally expected that the companies using these technique will be more than equal to(p) to run their operations efficiently. However, keeping in view the slip-up of hit agreement sail funding and accounting in this respect, it is argued that while using OBSF companies ar able to not disclose entirely the financing of their capital expenditures and thus the in formation required to be unwrap in this respect is not made available to the interested parties (Tyrrell 1986).This report discusses this atomic number 18a of accounting and explains how OBSF is real promoted by the market economies and the expectations of increase clams from the companies. The usage of murder repose flat solid accounting and financing is not new. In the beginning of 20th century, this concept of managing a companys balance sheet gained fame and the banking and other corporate sector applied this technique in their best possible interest with the main objective of keeping their balance sheets light weighted. Apart from a benefiting role played by the off balance sheet ccounting techniques, in that respect are some serious consequences which are often associated with the application of this concept. As for instance, it is argued that among many other reasons, the practices of off balance financing and accounting also had a significant circumstances in the rec ent financial downturn (Allen, et al. 2002). In this regard, Enron would be a good example to require upon. While striving for a healthy outlook of Enrons balance sheet, the management made use of special purpose entities with the objective of do large transactions which would not appear on the balance sheet of the company.This resulted in a healthy balance sheet outlook with huge of amounts of capital inflows and at the expense of nothing. However, this bubble of progress did not last long as the companys stock prices started fluctuating sharply and consistently. These events created a sense of being not informed entirely about the companys operations among the investors and after the Enrons climax, the regulators jumped in with Sarbanes Oxley Act 2002. The Act was aimed at securing the investments of investors and introducing regulations with respect to corporate social responsibility.But these checks proved to be ineffective upon the emergence of the financial crisis in 2008 (Hall and Liedtka 2007). add in the global competition and more expectations from the investors and shareholders to maximize their value of investments are regarded as the driving forces in the market which influence management to improve the financial picture of a company. In addition, these expectations pose insistency 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 loosely 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 expatiate 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 vindication of such improvements in the accomplish ance in the form of financial statements disclosures.For the purposes of obtaining security on the risky investments, corporations go to enter into complex third party arrangements which cannot be disclosed in the financial statements. Apart from this, mavin other motivating factor which is regarded as the major reason behind this approach of management is that they experience 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, operating lease holds special importance and is given more consideration by the management due to the fact that they require minimum disclosures in the financial statements and are usually for a long term. Lease accounting is covered by IAS 17, SSAP 21 (UK) and FAS 13 (USA) (McGerty 2004, Lim, Mann and Mihov 2005). earlier to the formulation of these accounting standards, there were no obligations on the companies to disclose in their financial statements the future payments related to lease and therefore leasing was recognized as an off balance sheet financing technique. Apart from leasing techniques, there are various other methods being employed by incompatible companies to move certain items off the balance sheet of the company. The use of off balance sheet techniques has been used to manipulate things.The most unremarkably used techniques to manipulate the financial information presented in the balance sheet of a company embroil swaps, variable interest entities (VIEs) and Special Purpose Entities (SPEs) (Ketz 2003). Although these tools have been used by companies around the world for different purposes which are mostly disclosed and transparent but the misuse of these tools has been also observed frequently by wa y of not disclosing the true facts. This practice has caused major setbacks to the global economy and also shattered the self-reliance of shareholders and investors (Hall and Liedtka 2007).As for instance, the collapse of Lehman Brothers is argued to have resulted due to off balance sheet approach followed by the company. In order to narrow down its balance sheet, Lehman Brothers moved its assets worth US dollar 50 one million million million from its balance sheet with the objective of portraying less amount of debt in the balance sheet (Rezny 2010). memory in view the above discussion and the facts stated related to the real world cases, it can be said that it is high time for the respective authorities to take measures in relation to this area of financial reporting.It is recommended that the governmental authorities and other financial reporting standards issuing bodies shall intervene appropriately through the repair channels to ensure transparency in the financial reportin g. Apart from this, the board of directors of corporations shall standardize the decision making processes and perform an effective oversight duty. In addition, it shall be made obligatory for business enterprises notwithstanding the sectors into which they fall, that all transaction shall be disclosed appropriately in the financial statements.Furthermore, the managers shall be motivated not pressurized to perform in the best interest of the organizations (Adams 1998). While concluding this report, it can be said that applying off balance sheet accounting and financing, whether for a good or evil purpose, has become necessary due to the increased expectations of the investors and shareholders related to the profitability of a business concern and also for the purposes of improving the financial statements overlook.Moreover, the lack of regulative measures in this respect also has its share in promoting the adoption of this approach. Apart from this, it can also be stated that the benefits resulting from off balance sheet accounting are also considered as a means of attaining hidden objectives by managers which in turn motivates them to misuse the concept and benefit from the restrictive loopholes.For the purposes of addressing these issues, it is pertinent that the regulatory authorities who are responsible shall make such arrangements which may promote such financial reporting practices which are more representative of the facts. In addition to this, the disclosure requirements related to off balance sheet accounting and financing activities are required to be revisited.