Off-Balance Sheet

February 16, 2019 0 By c.boersma

An important topic for an Actuary as there could be risks associated with a company that are not disclosed on a balance sheet directly.

For the most part these are stipulated by accounting guidelines like GAAP: due to being immeasurable, or unlikely to occur (< 50% chance). As a result it would be wise to be somewhat familiar with them.

Off-balance sheet (OBS), or Incognito Leverage, usually means an asset or debt or financing activity not on the company’s balance sheet. Total return swaps [investopedia] are an example of an off-balance sheet item.

~ Wikipedia 2019

Other Examples

  • Non-traditional lease: Operating lease [investopedia] obligations (Lessor)
  • Derivative instruments (market, credit, management, legal) – non-ownership of asset, but obligation for future payments
  • Contingent liabilities or losses (tax, litigation)
  • Letters of Credit and pledged assets (default)
  • Capital maintenance agreements: written agreements to support a subsidiary in the event of difficulty.
  • Structured settlement
  • Employee benefit agreements (pensions [investopedia])

Fall 2017 Q22 C – examples

  • The credit risk associated with the insolvency of the annuity company used to satisfy a structured settlement Contingent liabilities or losses due to tax, litigation, etc.
  • The risk that a lending institution defaults on a letter of credit, or a call on pledged assets
  • The parent company not honoring the capital maintenance agreement
  • The risk of derivative instruments.
  • Pension under-funding

Common mistakes include: Commenting on balance-sheet risks or questioning the quality of the balance sheet numbers.