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Off-Balance Sheet Financing: difference in GAAP and IAS

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Off-Balance Sheet Financing (OBSF) has been a concern of the accounting regulators. Recent FASB pronouncements have been closing the gaps in GAAP that allowed management to practice OBSF. SFAS No. 158: Accounting Statement for Pension/leases is an example of this trend.

Required:
A. Define OBSF and give examples showing how GAAP allowed firms this practice.
B. Explain how the "Delayed Recognition" approach adopted in SFAS No. 87 for Pensions represented an OBSF for employers.
C. Explain how SFAS 158 brought off-balance sheet obligations into the face of the balance sheet.
D. Explain the difference between GAAP and IAS (International Accounting
Standard)

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Solution Summary

The difference in GAAP and IAS for off-balance sheet financing is determined.

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ANSWERS

Question A
Off-balance sheet financing is the practice of keeping large capital expenditures "off the books" while at the same time reaping almost all of the benefits/income from those capital expenditures. This practice is done to control the company's debt to equity ratio and thus financial leverage ratios artificially low. US generally accepted accounting principles allowed companies to create special purpose vehicles which were then used to remove ...

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