What is an Off Balance Sheet Liability?

An off balance sheet liability is an obligation of a business for which there is no accounting requirement to report it within the body of the financial statements. These liabilities are usually not firm obligations, but might require settlement by the reporting entity at a future date. As such, they can be of great concern to someone interested in investing in or lending to the reporting entity.

Examples of Off Balance Sheet Liabilities

Examples of off balance sheet liabilities are guarantees, as well as lawsuits that have not yet been settled. Another such liability is accounts receivable that have been securitized and sold off to investors; this secured debt is shifted to a special purpose vehicle, and so is not recorded on the balance sheet of the originating entity. A business may also have off balance sheet liabilities related to joint venture arrangements with other businesses.

Presentation of Off Balance Sheet Liabilities

Though off balance sheet liabilities may not be reported on the balance sheet, they may still be described in the disclosures that accompany a complete set of financial statements. A close examination of these footnotes is a good way to uncover the existence of off balance sheet liabilities.

Fraudulent Use of Off Balance Sheet Liabilities

Companies sometimes structure liabilities to keep them from being reported on their balance sheets. By doing so, they can report a financial structure that appears to be more financially healthy and liquid than is really the case. By doing so, they are more likely to attract investments and obtain loans. In essence, this represents a form of financial statement reporting fraud if the firm is subject to a material liability that it has not reported.