Booyah Breakdown: Debt Uncovered

Granted, management isn't trying to pull the wool over your eyes. It's the FASB's rule. But since less debt on the balance sheet means a higher shareholder's equity balance, management is thrilled to throw some extra debt to the back of the book.

To get a true picture of the company's total debt liability, you need to crunch some numbers.

The biggest off-balance sheet obligations (a.k.a. off-balance sheet financing, off-balance sheet liabilities, off-balance sheet accounts) are operating leases, pension liabilities and special-purpose entities.

Thankfully, FASB took care of the SPE problem after Enron blew up (too little, too late, no?). But the other two items are hot these days.

Lease for Free

There are two basic types of leases: operating leases and capitalized leases.

In very, very simplistic terms (because someone is bound to email me), if you lease an item that doesn't have a special buyout option at the end, FASB says you can't really call that asset your own. The accountants dub that an "operating lease," since you essentially return the item when the lease is over.

So leasing a car for three years would be considered an operating lease. (Too bad I can't tell the credit agency to exclude that debt from my credit score.)