Dicussion pg 732

Dicussion pg 732 - only the required rental expense for use...

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Off-Balance-Sheet Financing A form of financing in which large capital expenditures are kept off of a company's balance sheet through various classification methods. Companies will often use off- balance-sheet financing to keep their debt to equity and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants. Contrast to loans, debt to equity, which do appear on the balance sheet. Examples of off- balance-sheet financing include joint ventures, research and development partnerships, and operating leases rather than purchases of capital equipment. Operating leases are one of the most common forms of off-balance-sheet financing. In these cases, the asset itself is kept on the lessor's balance sheet, and the lessee reports
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Unformatted text preview: only the required rental expense for use of the asset. Generally Accepted Accounting Principles in the U.S. have set numerous rules for companies to follow in determining whether a lease should be capitalized, included on the balance sheet, or expensed. The issue is that while GAAP and tax laws allow off-balance-sheet entities for valid reasons noted above, bad things happen when economic reality differs significantly from the assumptions that were used to justify the off-balance-sheet entity. Problems also occur when egos get too big. This term came into popular use during the Enron bankruptcy. Many of the energy traders' problems stemmed from setting up inappropriate off-balance-sheet entities....
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