Off Balance Sheet Financing

September 20th, 2008

Gordon Brown vowed this week that he would see the end of off balance sheet financing. This has been an issue in accounting since I started training - so it was in the last century.

What is it?
Off balance sheet financing is the use of legal form of transactions to bypass normal accounting standards. This allows an entity to fund assets withoutcthe true liability showing in it’s books and this the books look healthier than they really are. Clearly this is not good if you rely on accounts as true.

Who uses it?
Probably the largest user of these techniques in recent times has been the UK government! Their PFI schemes defer very large liabilities which extend for years into the future. And yet because of the legal form of these transactions they do not appear in the accounts. The London Underground is a prime example.

So if Gordon means it then well done and good riddance. If not then noone’s any the wiser anyway!

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