Leasing and off-balance-sheet financing assignment help is one of the top searched topics in financial accounting. Off sheet balancing refers to a method of financial reporting in which large capital expenditures are excluded from the balance sheet in order to bring down the debt/ equity down. Examples of off balance sheet financing include leasing, partnership, research and development and joint ventures.
Running lease is a common type of off balance sheet financing in most businesses. In this case, the lessor records the assets in his own balance sheet while the lessee reports only the expenses accrued in leasing the asset in his balance sheet. All this is done while observing the generally accepted accounting standards governing the business financial reporting. Off balance sheet financing is normally applied in order to preserve the level of borrowing capacity of the company as well as to comply with the financial standards.
When dealing with leasing and off balance sheet financing, lease can broadly categorized into financial and operating lease
Financial lease or capital lease refers to an instance where lessee buys the asset from lessor at the end of the agreement. The risk and rewards of the asset is usually transferred to the lessee.
On the other hand operating lease refers to the instance where the lessee rents the asset for a short duration of time. This is where off balance sheet concept applies since the value of the asset is not shown in the lessee books.
As a result of off balance sheet financing, some liabilities will not appear in the balance sheet. The cost of operating the lease for instance, will not be featured in the balance sheet. Operating lease is a lease agreement which takes a short period of time compared to the estimated useful life of the asset. According to the applicable accounting standards in US, operating lease does not form part of the balance sheet liabilities.
Leasing and off-balance-sheet financing is a common concept applied by most firms throughout the world. It is thus an important concept to all management students. This practice may however result to corporate corruption and failure to adhere to the recommended accounting standards. A good example of this is the Enron corporate scandal in which dubious accounting reporting and auditing flaws was used in order to deceive investors.
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