Question

Q5-O4-offB/S:

Which one is false?

Generally off-balance sheet financing decreases the usefulness of accounting information

Off-balance sheet financing may reduce the total assets and total liabilities on B/S.

Off-balance-sheet financing mostly increases return on assets (ROA)

Off-balance sheet financing may be frequently used by firms who has stronger restrictions on bond covenant.

Answer 1

• Off balance sheet financing is accounting treatment adopted by the organisation to reduce the liabilityor assets from reporting in Balance Sheet like in operating leaser where only lease rental is booked by the organization irrespective of the total lease liability and total payment. This is possible only when no proper disclosures are made by the organization regarding lease and its related terms. This method is adopted only by those organization where debt equity is not high otherwise it will create problem for the organisation.

False : Off-Balance Sheet Financing mostly increases return on Assets.

Because, if lease rental is recorded in place of total lease liability and payment then it will reduce the return in comparison to assets of the organization.