Off-balance Sheet Financing Research Articles

The Bottom-Line Choice: Lease vs. Buy – A Business Owner's Guide

This comprehensive guide navigates businesses through the intricate decision-making process of leasing versus buying, addressing the pivotal capital conundrum they face. The framework begins with a meticulous financial fitness check, evaluating cash flow, budget constraints, and long-term projections. Exploring various types of leases provides a nuanced understanding of leasing advantages, from flexibility to off-balance sheet financing. Conversely, ownership’s power is analysed, emphasizing control, stability, and long-term value creation. The guide integrates risk mitigation strategies for both options, emphasizing the importance of negotiating favourable terms and conducting due diligence. As businesses stand at the crossroads, this guide serves as a strategic compass, empowering informed decisions aligned with financial goals, operational needs, and sustained success in the dynamic business landscape.

Off-Balance Sheet Financing: A Weapon to Commit White-Collar Crime

Off balance-sheet financing is an accounting technique in which a debt for which a company is obligated does not appear on the company's balance sheet as a liability. Keeping debt off the balance sheet allows a company to appear more creditworthy but misrepresents the firm's financial structure to creditors, shareholders, and the public. The sudden collapse of energy-trading giant Enron Corporation is attributed in large part to the firm's off-balance-sheet financing through multiple partnerships. Off-balancing financing is an aspect of creative accounting. In this paper an attempt has been made to highlight various aspects of off-balance sheet financing as well as to provide some suggestive measures so that such mal practice can be eradicated.

The Impact of Off-balance Sheet Financing on Corporate Fraud

Off-Balance Sheet Financing (OBSF) is an accounting practice in which companies record certain assets or liabilities in a way that prevents them from appearing on the balance sheet. This procedure is used to keep the debt-to-equity ratio and leverage ratios low, especially if adding large expenses would overturn negative debt covenants. Examples of off-balance sheet financing include joint ventures, research and development partnerships (R&D), and operating leases. Companies sometimes take a creative approach when making large purchases. Holders of large debts often do whatever it takes to ensure that their leverage ratios do not lead to a breach of their agreements with lenders. Companies are also aware that a healthier-looking balance sheet is likely to attract more investors, and that banks tend to charge highly leveraged companies to borrow money since they are more prone to default. If a company takes on financing services, it must show these in its balance sheet. These include loans and other types of financial instruments. An off-balance sheet financing allows a company to get the financing without having to report it in the financial statement. Although it is a smart way of management to manage the company's finances, off balance sheet financing can sometimes create doubts about the company's operations. This type of accounting procedure is used to maintain the company's financial position and keep the investors' faith. The goal of this process is to show a low debt equity ratio to keep the investors' confidence. There are many ways to enter into a sheet financing agreement. It can be done through a partnership, a joint venture, an investment in an associate company, or leasing.

Off-balance sheet disclosure and leverage adjustment speed

This paper studies how accounting treatment of off-balance sheet financing affects the speed of capital structure adjustment. Utilizing a quasi-natural experiment created by Accounting Standards Update (ASU) No. 2016-02 which requires operating lease to be capitalized on the balance sheet, we find that firms adjust to target leverage faster after the announcement of the new standard. We also find that under-levered firms increase the speed of adjustment immediately after the announcement, whereas over-levered firms increase the speed of adjustment after the adoption of the new standard. Overall, our findings shed light on the impact of accounting disclosure on financial policy.

Is Ppp the New Firepower For Islamic Finance That Will Accelerate Progress Towards (SDGS)?

Having access to essential infrastructure services is pivotal in creating economic opportunities and bringing social services to the poor. Their deficiency leads to a number of negative consequences and lost opportunities (the World Bank indicates that currently 1 billion people live without electricity, 663 million people lack access to safe drinking water, 840 million people are located more than 2 kilometers from all-weather roads, and 4 billion people cannot access the Internet). The systematization of the results of World Bank research proved that lower-and middle-income countries need to spend on average 4.5 percent of GDP to deliver infrastructure services and achieve the infrastructure-related Sustainable Development Goals (SDGs). The urgency of solving this problem lies in the fact that in many countries, the high levels of investment required for infrastructure cannot be financed by the public purse alone. Therefore, the governments of these countries should pay attention to private investments as a tool for additional fundraising. The article presents the results of the analysis, which proved that the Private-Public Partnership has increasingly become a common structure for the delivery of public infrastructure. It offers the opportunity for governments and nongovernmental bodies to achieve more efficient projects by sharing risks and giving the private sector a chance to bring innovation to the design, construction, operation, and maintenance of public infrastructure. The study theoretically proves that public-private partnership offers monetary and non-monetary advantages for the public sector, in particular: allowing the allocation of public funds for other local priorities, distributing project risks to both public and private sectors, improved efficiency and project implementation processes in delivering services to the public, emphasizes Value for Money (VfM) – focusing on reduced costs, better risk allocation, faster implementation, improved services and possible generation of additional revenue. In the paper, based on a comparative analysis of conventional bonds and Sukuk (Islamic bonds), it was concluded that conventional bonds represent the issuer’s pure debt, while the latter offers multiple benefits: lower costs of funds due to higher rating via credit enhancement, access to the capital markets, diversification of funding sources, off-balance sheet financing (via securitization), improvement of financial ratios, and potential risk reduction.

Off-balance sheet funding, voluntary support and investment efficiency

Off-balance sheet financing of an investment is covered by limited liability, whereas on-balance sheet financing creates unlimited liability towards the bank’s asset-in-place. Off-balance sheet funding thus gives the bank flexibility to voluntarily support debt repayments when the investment fails, which allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, limited liability reduces the bank’s effort incentives. Off-balance sheet funding with voluntary support is optimal for activities that are rapidly growing or negatively correlated with existing assets. The model yields testable predictions on the relationship between off-balance sheet debt spreads and sponsors’ characteristics.

Does manager ability influence the classification of lease arrangements?

Purpose The purpose of this paper is to examine the influence of manager ability on a firm’s choice of lease classification and the decision to capitalize vs lease firm-specific assets. Design/methodology/approach The authors use regression analysis to examine the association between manager ability, lease classification and asset specificity. Findings Using 31,110 firm-year observations from 1998 to 2013, the authors find a significant positive relationship between manager ability and the decision to classify leases as operating. The authors also find that high-ability managers are more likely to capitalize, rather than lease, specialized firm-specific assets. Research limitations/implications The results imply that manager ability influences the choice of lease classification, which provides some support for the recent changes to lease accounting in Accounting Standard Update (ASU) 2016-02. The authors also show that asset specificity may serve as a mitigating factor in high-ability managers’ preference for operating leases, which implies that high-ability managers’ concerns with operational efficiency outweigh the benefits of off-balance sheet financing in their purchasing decisions if the asset in question is firm-specific. Practical implications The findings may be useful to boards of directors, investors and accounting academics concerned with the role that managerial ability plays in operational decision making and financial reporting. Originality/value The results imply that high-ability managers prefer off-balance sheet financing, which is unlikely to limit their access to external capital, but that this relationship is mitigated if the firm requires highly specialized assets.

Banks and Corporate Income Taxation: A Review

In this paper, I review the empirical literature in the intersection of banks and corporate income taxation that emerged over the last two decades. To structure the included studies, I use a stakeholder approach and outline how corporate income taxation plays into the relation of banks and their four main stakeholders: bank regulators, customers, investors and tax authorities. I identify six dimension where taxes are important for banks: debt financing, tax incidence, organizational form choices, profit shifting, financial reporting transparency and customers’ tax avoidance. In addition, the studies in this review show that corporate income taxes lead to distortions between debt and equity financing, between on- and off-balance sheet financing, of prices and of investment allocations. My contribution to the literature is threefold: First, I contribute by providing, to the best of my knowledge, a first comprehensive review on this topic. Second, I deduce policy implications from the studies under review. Third, I point to areas of future research in the intersection of bank regulation and tax legislation.

Government Assistance and Capital Structure: A Growing, Off-Balance Sheet Financing Source

Government Assistance and Capital Structure: A Growing, Off-Balance Sheet Financing Source

Comparison of Financial Leverage Ratio before and after the Use of Off-Balance Sheet Financing in Firms Listed in the Tehran Stock Exchange

The aim of this study was to compare the proportion of financial leverage in companies before and after the use of off-balance sheet financing in firms listed in the Tehran Stock Exchange. The research method was causal-comparative descriptive. The population was all the accepted companies in Tehran Stock Exchange (cars and car fragments, petrochemicals, petroleum products, cement, pharmaceutical, home and sugar appliances) between years of 2010 and 2014 that 87 companies were selected at random. Data were analyzed using independent t-test. Results showed that the average financial leverage for companies which have used off-balance sheet financing was equal to 0.6398 and the average financial leverage for companies that did not use off-balance sheet financing has been equal to 0.5612. Therefore, there was no significant difference between averages of the two samples. Other results showed that the average of return on investment (ROI) ratio in companies that used off-balance sheet financing had no significant statistical reference with an average of return on investment (ROI) ratio in companies that did not use off-balance sheet financing. As well, the average of return on owner’s equity (ROE) ratio in companies that have used off-balance sheet financing had no significant statistical difference with the average of return on owner’s equity (ROE) ratio in companies that have not used off-balance sheet financing.

Reserve requirements and optimal Chinese stabilization policy

China’s central bank frequently adjusts reserve requirements for macroeconomic stabilization. We evaluate the effectiveness of such policy in a two-sector DSGE model. A heavy-industry sector—proxied as state-owned enterprises (SOEs)—is financed through government-guaranteed bank loans subject to reserve requirements, while more productive private firms rely on unregulated off-balance sheet financing. Increasing reserve requirements reallocates resources towards private firms, raising both aggregate productivity and SOE bankruptcies. Optimal reserve requirement adjustments complement money supply adjustments in improving macroeconomic stability and welfare. However, gains are greater under sector-specific shocks, which call for resource reallocation, than under aggregate shocks.

Managing Tax Dispute Due to IFRS-16 on the Retrofits Implementation in Indonesia

The IFRS-16 will shortly be implemented worldwide, where the operating lease is effectively removed, and all operational leases are qualified as debt. The operational lease is a major source and is important for off-balance sheet financing in Indonesia. Therefore, the implementation of IFRS-16 will probably hurt Indonesian business. The contract and/or service level agreements on the retrofits for the energy efficiency product can relieve the business owner from cash flow and new debts. This study established a framework for a critical comparative study; compare and assess the possibility of the retrofit financial practices under the current taxes regime, and the possibility upon IFRS-16 implementation to better understand the favorable measures for retrofit practitioners and future customers to handle the disputes. Triangulate the findings of comparative study and questionnaire survey to develop recommendation for the future researchers, practitioners and the government. The result indicates that the benefits of the retrofits financing implementation beat the cost and complexity posed by the enactment of new IFRS standards. Thus, the impact of the IFRS-16 and taxation are being considered as a part of business constraints that should be addressed together and able to manage the disputes over misperception on retrofits aspects with taxes officers.

Securitisation, Ring-Fencing, and Housing Bubbles: Financial Stability Implications of UK and EU Bank Reforms

Declines in property markets played a central role in the Great Financial Crisis. Off-balance sheet financing activities, particularly securitisations, were used to fund higher volumes of bank lending, concentrated in real estate. In response to the current low appetite for securitisations, the European Union has proposed a new Securitisation Regulation, with the aim of restarting EU securitisation markets. This article explores the possible legal and economic significance of this Regulation and argues that the proposed approach to regulating securitisation is likely to be deficient. Instead of addressing flaws in the securitisation process through improved incentives—which I term ‘process-focused’ regulation—regulation ought to concentrate on the excessive credit-origination which securitisation may facilitate. This is particularly relevant to housing bubbles, which in general are driven by over-optimistic expectations about future house prices, shared amongst lenders, borrowers, and investors. Improving incentives in credit-channel widening structured finance when all parties are over-optimistic is unlikely to guard against future bubble formation. This is particularly relevant to the UK market in light of structural reforms to the UK banking sector (so-called ‘ring-fencing’), which is likely to result in today’s large universal banks being converted into monoline mortgage lenders.

The effects of listing status on a firm’s lease accounting: Evidence from South Korea

This study examines how the listing status affects a firm’s choice of lease accounting, using 7,023 firm-year observations that record either an operating or a capital lease from 2001 to 2013 in Korea. We find that unlisted firms are more likely to opt for operating leases, and to have a higher ratio of operating leases than listed firms are. These results indicate that unlisted firms tend to prefer operating leases which can be used as a tool to avoid increasing debt levels and to benefit from off-balance sheet financing (or unrecorded liabilities), compared to listed firms. This study contributes to the current accounting literature as it is the first to provide empirical evidence regarding the impact of the listing status on a firm’s lease accounting.

Securitisation, Ring-Fencing and Housing Bubbles: Financial Stability Implications of UK & EU Bank Reforms

Declines in property markets played a central role in the Great Financial Crisis. Off-balance sheet financing activities, particularly securitisations, were used to fund higher volumes of bank lending, concentrated in real estate. In response to the current low appetite for securitisations, the European Union has proposed a new Securitisation Regulation, with the aim of restarting EU securitisation markets. This article explores the possible legal and economic significance of this Regulation and argues that the proposed approach to regulating securitisation is likely to be deficient. Instead of addressing flaws in the securitisation process through improved incentives – which I term ‘process-focused’ regulation – regulation ought to concentrate on the excessive credit-origination which securitisation may facilitate. This is particularly relevant to housing bubbles, which in general are driven by over-optimistic expectations about future house prices, shared amongst lenders, borrowers and investors. Improving incentives in credit-channel widening structured finance when all parties are over-optimistic is unlikely to guard against future bubble formation. This is particularly relevant to the UK market in light of structural reforms to the UK banking sector (so-called “ring-fencing”), which is likely to result in today’s large universal banks being converted into monoline mortgage lenders.

Changes in Lease Financing Practice During Lease Accounting Standard Overhaul (2005-2014)

This study examines empirically the changes in lease financing practice since the International Accounting Standard Board (IASB) and the Financial Accounting Standard Board (FASB) launched their joint project to overhaul lease accounting standards. Under the proposed new lease standards, all existing and new lease contracts longer than 12 months, including the currently off-balance sheet operating leases, are required to be capitalised. Using a sample of retail sector firms from exchanges of seven different countries, I find an increase in contingent lease payments, which is consistent with the notion that companies will seek new off-balance sheet financing loopholes once existing ones are likely to be taken away. This study provides pertinent information to facilitate ongoing deliberation concerning lease accounting and assessment of the new lease accounting standards.

The Choice between Project Financing and Corporate Financing: Evidence from the Corporate Syndicated Loan Market

This paper examines the pricing of project finance (PF) and non-project finance (non-PF) loans and examines the factors that influence the borrower’s choice between project financing and corporate financing. Using a sample of 210,273 syndicated loans closed between 2000 and 2014, we find that PF and Non-PF loans are influenced differently by common pricing characteristics and that PF loans in the U.S. and W.E. are priced in segmented markets. Borrowers choose PF when they seek long-term financing and funding cost reduction. We find that transaction cost considerations, the financial crisis and country risk affect the financing choice. Our results document that publicly traded sponsors who prefer project financing to corporate financing are larger, less profitable, more financially distressed and have a higher asset tangibility. Finally, privately held firms that choose off-balance sheet financing are smaller and less profitable and use PF to raise relatively larger amounts of debt.

Analysis of Possibilities of Detectnig the Manipulation of Financial Statements in Terms of the IFRS and Czech Accounting Standards

The main objective of financial statements is to give information. The diversity of interests and objectives of individual groups of users and creators of financial statements presents the risk of manipulation of financial statements in the context of true and fair view as defined in the national accounting legislation. The paper is concerned with the different possibilities of detecting the manipulation of financial statements in terms of the Czech Accounting Standards and IFRS. The paper analyzes the selected risk detection models of the manipulation of financial statements using creative accounting methods, off-balance sheet financing methods and accounting frauds in specific case studies of selected accounting unit in terms of Czech accounting standards. Based on the analysis and comparison of the results thereof, the paper presents and evaluates the alternatives of users of financial statements to evaluate the risk of manipulation of financial statements beyond the scope of a fair and true view. The evaluation further includes a comparison of uses of these models with respect to the International Financial Reporting Standards.

Off-Balance Sheet Financing and Bank Capital Regulation: Lessons from Asset-Backed Commercial Paper

Many shadow banks rely heavily on bank-sponsored private credit and liquidity support, not government guarantees. The nancial crisis demonstrated that bank capital regulation cannot be eective without explicitly considering these facilities. Using a continuous time model with maturity mismatch and bank moral hazard, I study the impact of credit and liquidity guarantees on bank capital structure. I focus on a particular type of shadow banking called asset-backed commercial paper (ABCP). When banks provide credit guarantees to ABCP conduits, assuming that the validity of the guarantees is ensured by rating agencies, the commercial paper becomes risk free and is always priced at par. Rolling over the commercial paper is thus costless, so that frequently rolling over the short term ABCP to fund long term assets|a maturity mismatch| has no impact on bank value. Regulators can eliminate a bank’s moral hazard by imposing a simple capital ratio requirement. However, the capital ratio requirement is no longer valid if banks use liquidity guarantees in their ABCP conduit funding because the funding maturity becomes important. Moreover, a liquidity guarantee becomes as costly as a credit guarantee when the maturity shortens. Using Moody’s ABCP conduit data, I conrm that shorter ABCP maturity causes the bank’s return to be more sensitive to the conduit credit loss. Thus, when banks have signicant

Testing Black's Leverage Effect by Using 'Seemingly' Zero Leverage Firms

There is a significant negative relationship between stock returns and changes in future stock return volatility even among all-equity firms. While Hasanhodzic and Lo (2011) suggest that the inverse price and variance relation cannot be due to the classic leverage effect, our results suggest caution in dismissing Black’s (1976) theory. We document that many all-equity firms use off-balance sheet financing extensively, sometimes to the point of violating the financial covenants on their lines of credit. We show that by taking these facts into account, seemingly zero debt firms are much like their debt-financed counterparts in many dimensions. Our results suggest reexamination of the academic definition of firm level leverage.