what is the difference between off balance sheet financing and creative accounting..can any one explain with examples..
Off balance sheet financing is the use of forms of financing that do not readily appear on the balance sheet. This may be due to the failure of that source to exactly meet the requirements for recognition as a liability or other form of finance in the financial statements. For instance, an operating lease is often a desirable means of getting access to finance or resources. But under financial reporting standards(IFRSs), operating leases do not constitute a liability that is disclosable on the face of the balance sheet. Thus it is an example of an off-balance sheet form of financing.
Because it can be used as an alternative to borrowing funds from a financial institute to acquire the asset. If borrowing were used, a non current liability would appear on the balance sheet, together with the asset acquired. However, because the asset is leased under an operating lease , both the asset and corresponding liability is not reflected on the balance sheet. This ia a classic example of off-balance sheet financing.
Creative accounting is the practice of selecting polices or accounting measures that do not truly reflect actual activity. The effect of creative accounting is that information presented does not reflect a true and fair view. Thus the activities under the ambit of creative accounting can range from not-so-abjective presentation to outright criminal activities, all done to conceal the actual effect of transactions. Creative accounting can involve recognising revenue earlier than proper, understating expenses, overstating revenue, capitalising expenses instead of writing-off in the current period. Operating leases may also actualy be used with a deceptive intention in creative accounting.. Because there is no limit to the deception crafted by a cunning mind, the examples of creative accounting practices are endless…
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