What are Off Balance Sheet Items

Off balance sheet items are those assets or liabilities which do not appear on the balance sheet of a company and that is the reason why they are called off balance sheet items as they are not visible in the balance sheet of a company.

Off balance sheet items are quite controversial because many companies try to hide the real liabilities by showing those liabilities as off balance sheet items and thus hiding the real financial position of a company from the investors. Guarantees which are given by the banks to the company, letters of credit issued by banks to company, any expenses related to litigation when the company is sued by third parties for damages, contingent liabilities etc…, are some of the examples of off balance sheet items.

Off balance sheet items are of particular significance when company is applying for loans from the banks as banks tend to see debt equity ratio before granting loans to a company and if the debt equity ratio of company is not favorable then company may show real liabilities as off balance sheet items which will make the debt equity ratio of company favorable and therefore it will help the company in taking loan from bank. It is due to this reason bank pay particular attention to off balance sheet items before giving loans to companies.

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