Off balance sheet

The balance sheet recognises what accounting standards say must be recognised, which is not the same as everything the business is committed to. Guarantees given to a subsidiary or a joint venture, long term purchase commitments, and litigation that has not crossed the recognition threshold all sit outside the totals and inside the notes.

The largest historical example has now mostly gone. Before IFRS 16, operating leases were disclosed as future minimum payments in a note, which meant a retailer with hundreds of leased stores could report modest reported debt while being contractually committed to years of rent. Analysts capitalised those commitments themselves, using rough multiples of annual rent, precisely because the balance sheet was not doing it for them. IFRS 16 brought nearly all of it on, so a company that suddenly reported large lease liabilities was disclosing an obligation that already existed rather than taking on a new one.

US GAAP under ASC 842 also brought leases onto the balance sheet, but retained the operating and finance distinction for the income statement, so a US reporter shows a single straight line lease cost within operating expenses while an IFRS reporter splits the same lease into depreciation and interest. The obligation is on both balance sheets; the profit geography differs, which flatters an IFRS reporter's EBITDA relative to a US one.

What remains genuinely off balance sheet is smaller but not trivial, and the general skill is the same: read the commitments and contingencies note, then decide for yourself which of it belongs in your view of leverage.