offbalance

Off-balance sheet (OBS) refers to assets, liabilities, or financial arrangements that are not recorded on a company's balance sheet but may still affect its financial position and risk profile. Observed primarily in corporate finance, OBS items are disclosed in notes or elsewhere in financial statements. They are generally legitimate under accounting standards when they do not meet criteria for recognition on the balance sheet, but they can also be used to conceal leverage or risk.

Common OBS arrangements include operating leases under older accounting rules, which kept lease obligations off the balance sheet; securitization of receivables or other assets via special purpose entities (SPEs) or variable interest entities (VIEs); guarantees and lines of credit that are not recognized as liabilities; and certain forms of derivatives and hedges that do not result in on-balance sheet net exposures due to accounting treatment. The introduction of updated standards, such as ASC 842 in the United States and IFRS 16 internationally, has generally brought many leases onto the balance sheet, reducing OBS financing.

The purpose of OBS arrangements can include financing flexibility, risk management, or regulatory/compliance considerations. Critics argue that OBS items can obscure true financial leverage, making it harder for investors and creditors to assess risk. Regulators and accounting standard-setters have sought greater transparency, increasing disclosure requirements and, in many jurisdictions, consolidation rules to require recognition of certain entities and obligations on the balance sheet.

Investors typically review a company's OBS disclosures to understand potential off-balance sheet risks, including contingent liabilities, performance guarantees, and any exposure from non-consolidated affiliates or securitized assets.