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Essay on Enron Corporation: Off Balance Sheet financing
Definition:
Off balance sheet usually means an asset or debt or financing activity not on the company's balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. (Wikipedia, 2005)
Can be explained as the different methods of acquiring capital by a company, which is not stated, on the financial statement of the company. The most commonly used methods of raising money which does not appear on the balance sheet is in the shape of the research and development partnerships, different kinds of lease, and Joint ventures etc. are the common methods used. Most of the companies obtain funds by using their product idea on intelligence and knowledge about any specific field and acquiring the capital from the partner. Since the partner who is providing the capital can just invest money and do not have much knowledge related to the product therefore the person having the main idea retains the significant control over the project. In this way the company can purchase the joint venture through lease and by using a joint venture instead of funding the project out of its own funds, the company can accomplish an important objective while preserving its cash for other purposes.
Research and development ventures can be used in the same way to acquire the funds. In the case of the research and development ventures the company provides the knowledge about the product to a restricted no. Of partners and acquire the capital from them without and considerable changes on its balance sheet. If the venture become successful and the company become successful in meeting its targets the company may either pay the partnership a royalty or purchase the product for a price that nets the contributing partners a fair return on their investment....
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