The term off-balance sheet (OBSF) financing refers to an accounting practice that involves recording corporate assets or liabilities in such a way that doesn't make them appear on a company's balance sheet

The practice is used to keep debt-to-equity (D/E) and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants. Off-balance sheet financing is a legal practice as long as companies follow accounting rules and regulations. It becomes illegal if corporate heads use it to hide assets or liabilities from investors and financial regulators

Companies with mountains of debt often do whatever they can to ensure that their leverage ratios do not lead their agreements with lenders, otherwise known as covenants, to be breached.

OBSF is commonly used by businesses that are highly leveraged, especially when taking on more debt means a higher debt-to-equity ratio. The more debt a company has, the higher the risk of default for the lender. This means charging the company a higher interest rate.

This practice involves omitting certain capital expenditures or assets from the balance sheet. This means shifting ownership to other entities like partners or subsidiaries in which the company secures a minority claim. As such, examples may include joint ventures (JV), research and development (R&D) partnerships, and operating leases. Some corporations use special purpose vehicles (SPVs) with their own balance sheets to which they transfer these assets and liabilities.

Although it sounds sketchy, off-balance sheet financing is a legitimate and very legal practice—as long as companies abide by established accounting rules and regulations. Companies in the United States are required to abide by generally accepted accounting principles (GAAP).
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The strategy becomes illegal when it is used to hide financial irregularities, as was the case with Enron.