Off-Balance-Sheet Financing

Companies may use arrangements that provide the benefits of borrowing without recording debt. Historically, examples included operating leases, sales of receivables with recourse, special purpose entities holding assets and debt, and certain joint ventures.

Off-balance-sheet arrangements can have legitimate purposes, such as sharing risk with partners or financing specific projects. But they can also hide the true level of a company's obligations. Enron, which collapsed in 2001, used special purpose entities to keep large amounts of debt and losses off its balance sheet.

Accounting standards have since tightened. Rules on consolidation require companies to include entities they control, and newer lease standards, IFRS 16 and ASC 842, brought most leases onto the balance sheet.

For example, before these lease rules, an airline leasing most of its aircraft could show very little debt. Today, those leases appear as lease liabilities. Analysts still look carefully at disclosures about guarantees, commitments and unconsolidated entities to find obligations that may not appear on the balance sheet.