Question

State whether off balance sheet activities should continue to be handled under current accounting standards - that is, the current accounting standards are adequately addressing such transactions - or whether changes should be made, and if so, what kind of changes?

What is the essence of off-balance-sheet accounting? What does the process entail? Is off-balance-sheet accounting ethical?

Answer 1

1.Off balance sheet activities are permissible by the framework done by the GAAP or IFRS through provisions of accounting standards mainly during financial crisis but some standards exists in standard way for usage. Changes should be definitely made like disclosing such off balance sheet activities in one way or the other like disclosing them in the footnotes or otherwise.

2. The essence off balance sheet accounting is to provide clean balance sheet without losing much payment for dividends and other interest payments so on and so forth. The managers apply particular accounting methods certain type of methods to show a little debt of the company and preventing any market crashes. This is done through implementation of accounting standards for those making up of those expenses. As these apply indirectly for one or the other standard this is not unethical.

3. For example. A company makes profits far away from the previous year's, then the managers or the personnel responsible for accounting pay the dividends as usual in a certain percentage and the remaining which should be distributed as dividends to the same persons in a more percentage form are limited and these amount is invested for acquiring an asset say in a lease form or otherwise.

4. The investors even should have knowledge about these kind of off balance sheet activities so that they get invested in a more reliable form.

5. GAAP and IFRS suggest some things of off balance activities activities only at times of financial crisis and even that things should be definitely mentioned in the footnote.

6. Only usage of the standards provided by the GAAP or IFRS for off balance sheet activities are ethical and the remaining all making ups are unethical.