These things tend to move in cycles, but one expression I think ought to be killed off, deleted, removed, or otherwise expunged from financial affairs is “off-balance sheet”. What this term means, at least according to Wikipedia,, are assets or liabilities that are not recorded on the balance sheet of a company’s accounts but ring-fenced in a separate, legal entity. But in fact what has turned out to be the case is that in the end, these things tend not to be very “off” any balance sheet at all. Take Britain’s private finance initiative (PFI), in which private companies bid to carry out government-funded contracts like building roads or hospitals, operate said facilities for a period of time – like 10 years – and then return them to the State’s control. The government is able to get things built, but, oh so wonderfully, the debt that the government may have to shoulder for the cost of paying for these things is “off-balance” sheet. Marvellous. Many of the banks now mired in the credit crunch ran complex-sounding things called SIVs (structured investment vehicles), which were “off balance sheet”; by using derivatives to insure their debt risks, they also moved a lot of liabilities “off balance sheet”. But in the end, come the economic storms, this will not work. Sooner or later, back to the balance sheet these things must go.
As Ayn Rand might have put it, if you evade the facts of reality, sooner or later they will bite you. That applies to accounting as much as anything else. I wonder if I can move my mortgage or credit card bill “off my balance sheet”. Somehow I don’t see that working out too well.
Why not start with the public entities “balance sheets?”
A few years ago a young woman produced a Financial Statement of the the United States.
Bring on to the Balance Sheets of public entities the obligations we have passed over as social policies [Special Spending Vehicles] to governmental functions: Those here (and likely in the U.K.) are “unfunded.” Worse, they are undisclosed, hidden from view.
If “Balance Sheets” are so vital, why are they not enforced for those most coercive of all enterprises – governments?
IIRC New Zealand is about the only honourable exception, having actually run a company style balance sheet (at least for a period in the recent past).
The disincentive for governments to do this is that they would be shown not to be viable as a going concern, were they to be held to account like a company is; financially as well as morally bankrupt.
But it would be so pleasing to be able to bring a winding up order against any of them.
“Off balance sheet” is nothing more than a euphemism for undisclosed. The debts still exist and are going to be collected*, but they are hidden from public view. A balance sheet is no more than a public statement of a company’s assets and liabilities (or rather those it can’t hide).
I believe the only statement in statutory accounts users take seriously is the cashflow statement; it’s not true that cash can’t lie, but it is harder to distort.
*Any lender with an ounce of common sense (which covers many but by no means all lenders) will require far greater security if lending to an off balance sheet vehicle than if the loan is going to be fully disclosed.
Strange that it’s always the liabilities that go off balance sheet, never the assets. I wonder why that is?
A good post and good comments.