Module 9. Reporting and Analyzing Off-Balance Sheet Financing. Why is Off-Balance Sheet Financing Important?. In other words, why are firms so interested in “hiding” debt?
Reporting and Analyzing Off-Balance Sheet Financing
This can be inferred from the capital lease disclosures, or one can use the company’s debt rating and recent borrowing rate for intermediate term secured obligations as disclosed in its long-term debt footnote.
This is because the activities of the VIE are constrained and, as a result, investors purchase well-secured cash flows that are not subject to the business risks of providing capital directly to the sponsoring company.
The sponsoring company is, thus, able to utilize VIEs to remove assets, liabilities, or both from its balance sheet. Further, since the sponsor realizes the economic benefits of the VIEs’ transactions, the sponsor’s operating performance ratios (return on assets, asset turnover, leverage, etc.) improve.