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Off-balance financing (also referred to as alternative financing) comprises financial instruments that affect only the profit and loss account of a company and not the balance sheet.
A company chooses off-balance financing in order to reduce strains on liquidity and capital lockup. This enables the company to maintain the equity ratio, avoiding a degradation of its credit rating. In return, it has to accept higher total costs in comparison to financing on-balance.
Leasing, especially operating lease, is the most widespread form of off-balance financing in Germany. Leasing is provided by general leasing companies or companies who specialize in financing particular goods.
Various interpretations of the term “leasing” exist in different sets of accounting rules, for example, in the International Financial Reporting Standards (IFRS ) and in the German Accounting Rules (Handelsgesetzbuch, HGB).
To qualify as off-balance financing, the financing measure must be an operating lease. An operating lease is usually a short-term financing instrument in which the ownership and risk stay with the lessor. The lessee pays an expense fee comprised of interest and remuneration for depreciation. Other forms of leasing and their activation in the balance sheet are shown in the following illustration.
More information on leasing in Germany is provided online by the German Association of Leasing Companies (Bundesverband Deutscher Leasing-Unternehmen).
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