Financial Accounting Blog

Tuesday, December 16, 2003 outlines the types of off-balance-sheet entities that are and are not compliant with GAAP regulations. The article also warns that there may be severe repercussions if investors lose faith in financial statements.
Companies have used off-balance-sheet entities responsibly and irresponsibly for some time. These separate legal entities were permissible under GAAP and tax laws so that companies could finance business ventures by transferring the risk of these ventures from the parent to the off-balance-sheet subsidiary. This was also helpful to investors who did not want to invest in these other ventures. Since "Enron-gate," however, companies that have any kind of off-balance-sheet items, whether justifiably or not, are being branded with a scarlet letter "E." This article will define some typical off-balance-sheet items and discuss whether they are "good" or "bad.