Question

Name and define three bank off-balance sheet items. Provide examples (one for each) of how each of these items can give rise to changes on the financial statements (statement of condition or statement of income)

Answer 1

Off balance sheet refers to items that are effectively assets or liabilities of a company but do not appear on the company's balance sheet.

Though these items did not appear in Balance sheet but it is accompanie by notes to accounts. It may effect the financial position of any company ,if conditions are adversed to the company. Sometimes it may affect the solvency of the company and it leads to bankruptcy.

Examples of off balancesheet items are:-

1. Pending cases in the court :- Suppose a company is busy in manufacturing oil products and pollution is effection the whole area. Some of the citizens file petition to the court and there after court ordered to shut the company or to build some chimeny in the factories so that pollution problem would be solved. Though this court settlement would not appear in balance sheet but it can effect the going concern concept of the company,

2.Gurantee given by company:- Suppose a company sold his loss making division to another company and the seller company has given gurantee to buyer company that if liablities of their loss making divison would not going to pay the due sum, then in this case Seller company will pay the due amount. It will effect the deficit of huge cash in the company.

3.Self generated goodwill:- This item does not appear in the balancesheet but in the event of selling of company they make the proper valuation of goodwill to charge the exact price from the buyer company.