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Definition

A dubious accounting practice whereby a company seeks to hide the true state of its indebtedness by either using operating leases to acquire the equipment it needs to manufacture or by forming partnerships which it controls but which are not consolidated with its financial statements. In an operating leases, the company undertakes to buy the equipment at the end of the lease, but in the meantime, it is treated as an expense rather than as an asset which has been financed. Partnerships, even where the company controls the partnership, are not necessarily included in the companies financial statements. So the partnerships debts are not reflected among the company's liabilities. These practices were employed by Enron to hide the true extent of its liabilities. The accounting rules have been tightened up since then and most off-balance sheet financing is illegal.

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