Editing Off-balance-sheet (section)

{{short description|Asset, debt, or financing activity not on a company's balance sheet}}
{{accounting}}

In [[accounting]], "'''off-balance-sheet'''" ('''OBS'''), or '''incognito leverage''', usually describes an [[asset]], [[debt]], or financing activity not on the company's [[balance sheet]]. [[Total return swap]]s are an example of an off-balance-sheet item.

Some companies may have significant amounts of off-balance-sheet assets and [[Liability (financial accounting)|liabilities]]. For example, [[financial institution]]s often offer [[asset management]] or [[brokerage]] services to their clients. The assets managed or brokered as part of these offered services (often [[Security (finance)|securities]]) usually belong to the individual clients directly or in [[Asset-protection trust|trust]], although the company provides management, [[Depository institution|depository]] or other services to the client. The company itself has no direct claim to the assets, so it does not record them on its balance sheet (they are off-balance-sheet assets), while it usually has some basic [[fiduciary]] duties with respect to the client. Financial institutions may report off-balance-sheet items in their accounting statements formally, and may also refer to "[[assets under management]]", a figure that may include on- and off-balance-sheet items.

Under previous accounting rules both in the United States ([[Generally Accepted Accounting Principles (United States)|U.S. GAAP]]) and internationally ([[International Financial Reporting Standards|IFRS]]), [[operating lease]]s were off-balance-sheet financing. Under current accounting rules (ASC 842, [[IFRS 16]]), [[operating lease]]s are on the balance sheet. Financial obligations of unconsolidated [[Subsidiary|subsidiaries]] (because they are not wholly owned by the parent) may also be off-balance-sheet. Such obligations were part of the [[Enron scandal|accounting fraud]] at [[Enron]].

The formal accounting distinction between on- and off-balance-sheet items can be quite detailed and will depend to some degree on management judgments, but in general terms, an item should appear on the company's balance sheet if it is an asset or liability that the company owns or is legally responsible for; uncertain assets or liabilities must also meet tests of being ''probable'', ''measurable'' and ''meaningful''. For example, a company that is being sued for damages would not include the potential legal liability on its balance sheet until a legal judgment against it is likely and the amount of the judgment can be estimated; if the amount at risk is small, it may not appear on the company's accounts until a judgment is rendered.