Question

In the late 1900s and early 2000s, a company could form a 'special purpose entity' (SPE)--under GAAP rules--to remove liabilities and assets off the company's financials--known as Off Balance Sheet Financing (OBSF).

1. There are several possible perspectives that can be taken in this topic--in many situations, there is not a right or wrong answer. Critically analyze the pros and cons of Off Balance Sheet Financing and take a position as to being for or against OBSF.

2. Critically analyze at least two other classmates posts. If their position agrees with your own, take an opposing point of view and comment accordingly.

Answer 1

off-balance-sheet financing: it is a method where the company doses do not include liabilities in the balance sheet. This will affect the company evaluation. common liabilities that are considered under off-balance-sheet financing is a lease.

this is when the company is having huge debt but doesn't want to show that om the balance sheet. This will impact the decision of investors and other stakeholders.

pros of off-balance-sheet financing:

1. high expenditure or debt company can take advantage of this
2. the company can take more capital through debt, because the financial statement might look stable.
3. Investors of the company might be attracted because of low debt or liability.

cons of off-balance-sheet financing:

1. it doesn't give overall financial position of the company
2. an investor might not get a correct picture of the company
3. the company might end up taking more debt