Off-balance-sheet records

What it means

Off-balance-sheet records capture facts that do not belong in the balance sheet itself but matter for assessing assets and liabilities: guarantees given and received, assets under an operating lease, property held for others, written-off receivables.

These are accounts in a class that does not enter the balance sheet totals. They are nonetheless part of the books, and the information is disclosed in the notes to the annual accounts.

An off-balance-sheet item differs from a provision in how likely it is to cost money. A provision is made when a future outflow is probable and can be estimated, and it is charged to expenses. A guarantee that is not expected to be called stays off the balance sheet and does not touch profit. When that changes, the item moves onto the balance sheet.

How it works in practice

Typical items in a small company: a leased car, equipment lent by a supplier, a guarantee for another company’s loan, a tender deposit, goods taken on consignment.

The records also feed the stocktake - checking whether a guarantee is still live and whether entrusted property exists and is with the person it should be with.

Companies often also keep low-value assets off the balance sheet once they have been expensed on purchase - laptops, phones, tools. The records then show which employee has which item and what must come back when they leave, even though the balance sheet no longer shows those assets.

What to watch out for

Guarantees given are the largest risk: invisible on the balance sheet, yet capable of becoming a real liability in full. That is exactly why due diligence and banks ask about off-balance-sheet items right after the statements.

A common failure is records set up when a contract is signed and never updated again. Years later they still list cars long returned and guarantees long expired, so the notes to the accounts describe risks that no longer exist and the bank or auditor has to check everything from scratch.