Leasing is often referred to as off-balance sheet financing of the way that the

Question

Leasing is often referred to as off-balance sheet financing of the way that the transaction is treated and reported in financial statements.

1. Which of the following statements best decribes the characteriestics of off-balance sheet financing?

a. Only the leased liabilities but not the leased assets under the lease contract appear directly on the firm's balance sheet?

b. neither the leased assets nor the leased liabilties under the lease contract appear directly on the firm's balance sheet

c. Only the leased asset but not the leased liabilities  under the lease contract appear directly on the firm's balance sheet

d. Both the leased asset and the leased liability under the lease contract appear directly on the firm's balance sheet

Explanation / Answer

(b) Neither the leased assets nor the leased liabilities under the lease contract appear directly on the firm's balance sheet.

Only this statement is correct. All other three statements given under options (a), (c) and (d) are incorrect. Off-shore balance sheet financing is financing method in which a firm acquires the right to use an asset without buying it. In off-shore balance sheet financing, companies record certain assets and liabilities in such a way that keeps them from appearing on the balance sheet. In an operating lease, the company records only the rental expense for the asset rather than the full cost of buying it outright. When a company buys it outright, it records the asset and the liability. Hence, in off-shore balance sheet financing, leased asset and leased liabilty are not recorded in the balance sheet.

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