- = OBSFA method of financing a company's activities so that some or all of the finance and the corresponding assets do not appear on the balance sheet of the company. By making use of OBSF a company can enhance its accounting ratios, such as the gearing ratio and return on capital employed, and also avoid breaking any agreements it has made with the banks in respect of the total amount it may borrow. It has been possible for companies, by drawing up complex legal agreements, to conduct off-balance-sheet finance and thus mislead the user of the accounts. The accounting profession has attempted to counter these practices by emphasizing that accounting should reflect the commercial reality of transactions and not simply their legal form. Financial Reporting Standard 5, Reporting the Substance of Transactions, provides specific guidance for certain transactions, such as factoring and consignment stock, for which companies have previously used off-balance-sheet finance.In the USA, off-balance-sheet finance was identified as a major factor in the scandal surrounding the collapse of the energy-trading giant Enron in 2002 – the largest business scandal in US history.
Accounting dictionary. 2014.
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