While the use of off-balance sheet entities proliferated in the past two decades, the US GAAP could not catch up. That made them a fertile ground for corporate malfeasance. Enron took it to the extreme by hiding huge level of debt. FIN 46, the latest from FASB on the subject, aims to bridge the gap.

The terms `specialpurpose entities' and `off-balance sheet entities' acquired fame and notoriety in the postEnron saga of accounting frauds. So intense was the hatred for anything off-balance sheet that even the stocks of the likes of GE were not spared from butchering on the bourses. It's as if almost anything off-balance sheet is a stigma (see Off-balance Sheet Jitters). The need for addressing the lacunae in the accounting framework for these entities became imperative for the standardsetter Financial Accounts Standards Board (FASB). It took FASB a year to come out with a solution. The solution that FASB announced is in the form of interpretation called FIN 46 (Financial Interpretation No. 46), which is in the nature of an exception1 to the existing Generally Accepted Accounting Principles (GAAP) consolidation standards2.

Apart from understanding the mechanics of application of FIN 46, attempts are being made to assess its implications for all segments. The scope of FIN 46 is likely to extend to all forms of off-balance sheet financing structures including Special Purpose Entities (SPEs), entities used for securitization, leasing etc.

Off-balance sheet financing, a product of financial innovation, was designed to provide companies with strategic advantages. It provides an avenue for businesses to hive off risky or unrelated lines of business into unconsolidated subsidiaries. Thus companies can house activities that the parent's shareholders do not want their company to take up or shift the assets to liberate the parent from the associated debt burden. More important is the vital risk transfer.

Balance Sheet, Financing, Accounting Road Map, US, GAAP, FIN 46, FASB, debt burden, financial innovation, strategic advantages, unconsolidated subsidiaries, shareholders, financing structures, Special Purpose Entities (SPEs), Generally Accepted Accounting Principles (GAAP), accounting framework, accounting frauds, off-balance sheet entities, Financial Accounts Standards Board (FASB).