Why were some leases referred to as off-balance sheet financing prior to 2019?

Jump to Solution
Category:

Why were some leases referred to as off-balance sheet financing prior to 2019?

0
0

Why were some leases referred to as off-balance sheet financing prior to 2019?

Explanation & AnswerSolution by a verified expert

Explanation

The off-balance sheet financing is a practice of not reporting a liability directly on a company's balance sheet, the liabilities are reported in such a way that they do not appear in the balance sheet.
The operating leases were called the off-balance sheet financing as they were not reported directly on the balance sheet even after the company had the right to use the asset and it makes regular payments for the use of assets as per the agreement. Lease liability was recorded as a rent expense in the income statement of the company, however, the net profit after deducting rent expense is transferred to the balance sheet from the income statement.
This practice may not depict the actual financial liabilities of the company to the investors before making investments.

Verified Answer

The lease liability under an operating lease was reported as a rent expense in the income statement of the company and not reported on the balance sheet prior to the accounting standards amendments in 2019. So these leases were called off balance sheet financing.

Purchase this answer to view it. $5
Login/Sign up for free, load your wallet instantly using PayPal or cards and purchase this solution to view it.

Looking for the solution to this or another homework question?

If you need essay writing assistance or homework solutions, log in or sign up for a free account and ask our writers any homework question.