Off-Balance Sheet Accounting: Motivation, Methods, Consequences and Solutions

Off-balance sheet accounting is one of the most important challenges facing the accounting profession today. Management are involved with off-balance sheet accounting because of some reasons such as increasing cash flow, improving financial leverage ratios, reducing borrowing costs and tax management. Offbalance sheet accounting methods could divided into four groups: the equity method, accounting for leases, accounting for retirement benefits and special purpose entity. To off-balance sheet financing, also some tools such as operating leases, factoring, specific projects financing, outsourcing and securitization has been used. Off-balance sheet accounting have damaging consequences such as reducing the utility of financial reporting, threatening the integrity of the accounting profession itself, weakening the capital market and happening financial crisis. To cope with these consequences, revising and expanding the definitions of assets and liabilities, concentrating further on the content preference on shape of accounting standards and business operations, increasing the scope of financial statement’s consolidation and extending of disclosure scope are proposed.