Off-Balance-Sheet Arrangements

Many uses are legitimate, including securitisation, joint ventures and leasing. The concern arises when a structure hides borrowing or risk so that ratios look better than the economics warrant. Typical devices are a special purpose entity (also called a special purpose vehicle) set up with just enough outside equity to avoid consolidation, guarantees given to lenders, take-or-pay purchase contracts, repurchase deals treated as sales, and stakes in affiliates held below the control threshold. After accounting scandals in the early 2000s, consolidation rules were tightened to focus on control, and disclosure of remaining commitments was extended. IFRS 16 brought most leases onto the balance sheet. Analysts still adjust reported debt for commitments found in the notes. Auditors and regulators look closely at any entity that sits outside the group but is financed, run or guaranteed by it. Analysts therefore read the notes for guarantees and commitments before trusting a debt ratio.

A property developer transfers four buildings and their loans to a separate vehicle, keeping 3% of the equity while guaranteeing the loans. The vehicle is not consolidated, so group debt looks 40% lower than the economic position. When a tenant defaults, the guarantee is called, and the group takes a sudden loss. An auditor reviewing the notes had flagged the guarantee as a disclosure matter.