Main ways of off-balance sheet financing:
1. Long-term lease: Lease is a traditional and still popular off-balance sheet financing method. According to the different economic essence, leasing can be divided into operating leasing and financing leasing.
2. Financial leasing: The current accounting standards only require the balance sheet to reflect the assets and liabilities of financial leasing. For the lessee, if the lease business meets the following four conditions, it is a financial lease, otherwise it is an operating lease:
(1) When the lease expires, the lessor transfers the ownership of the assets to the lessee;
(2) The lessee has the option to buy cheaply;
(3) The lease term is most of the service life of the asset (such as more than 75%);
(4) The present value of the minimum lease payment on the lease start date shall not be less than most of the fair market value of the assets (such as more than 90%).
But in fact, for the above reasons, the lessee often tries to conclude a lease agreement with the lessor (sometimes at the expense of giving up part of the benefits). For example, the lease term will be slightly shorter than the fixed number of years defined in the guidelines, so that although the risks and benefits related to the ownership of leased assets have basically been transferred to the lessee from an economic point of view, the lessee can still be treated as an operating lease.
3. Joint venture: In recent ten years, there have been many off-balance-sheet financing methods in the United States to meet the capital needs of large-scale construction and operation projects, among which joint venture is a common one. Specifically, if an enterprise holds a considerable amount of owner's equity of other enterprises, but does not reach the holding level, the latter is called an unincorporated entity. Because the enterprise does not control the unincorporated enterprise, it only needs to recognize the long-term investment as an asset, without reflecting the liabilities of the unincorporated enterprise on the balance sheet. Some enterprises arrange investment structure and engage in off-balance-sheet business in non-corporate enterprises without involving merger, so as to obtain the benefits of full holding as much as possible. For example, there is a popular form of joint venture called Special Purpose Entity (SPE). Marin Fund, which serves Enron, mentioned in Investors: Beware of Off-balance-sheet Financing Trap, is such a company. This practice of exploiting legal loopholes has caused widespread controversy.
4. Asset securitization: As a project financing method, asset securitization originated in the early 1970s and was first used to promote residential mortgage financing in the United States. In 1980s, this financing method was widely used all over the world. Securitized assets usually include: housing mortgage loans, credit cards, auto loans, accounts receivable, lease receivables, etc. Its operation mode is usually that the financier transfers the ownership of an asset to a financial institution, and the financial institution issues bonds to investors in the bond market with the future income of the asset as the guarantee. Although asset securitization is a financing activity in economic essence, from a legal point of view, it is only a transfer of assets, so it is not required to be reflected on the balance sheet. Of course, the process of asset securitization is very complicated, involving many legal, foreign exchange management, accounting treatment and other issues, especially in China.
5. Innovative financial instruments or derivative financial instruments: In recent years, innovative financial instruments have exploded. These financial instruments mainly include swaps, swaps, embedded options, compound options, upper limit options, lower limit options and upper and lower limit options. Due to the change of environment, the intensification of competition and the need to control risks, the momentum of financial instrument innovation will continue unabated. However, the formulation of accounting standards has not kept pace with the innovation of financial instruments. At present, according to the current accounting standards, most of the financial assets and liabilities generated by the use of innovative financial instruments cannot be reflected in the financial statements, but can only be disclosed in the notes to the statements. Therefore, the use of innovative financial instruments can also achieve the purpose of off-balance sheet financing to a certain extent.