Companies use off-balance sheet accounting so that they do not have to include certain assets and liabilities in their financial statements. Off-balance sheet accounting is often used to make the balance sheet look like the company has less debt than it actually does. One method used by companies to achieve off-balance sheet accounting is classifying capital leases as operating leases.

New GAAP accounting rules and the SarbanesOxley Act now require that capital leases must be included on the balance sheet as both an asset and liability. However, leases with a duration of less than 12 months and other long-term leases are still excluded from this reporting.

Off-balance sheet accounting is beneficial to companies as it eliminates both assets and debt from the balance sheet, improves companies liquidity ratios such as its current ratio and quick ratio, and lowers leverage ratios such as debt to equity and debt to asset.

You are a new accountant for a company and have discovered that the companys management has formed a new corporation that will build a new corporate headquarters for the company and then lease the asset to the company on a 30-year lease. Thus, allowing the company to employ off-balance sheet accounting for the new assets. The arrangement will also allow management to make additional income from their new venture.

Scenario: The board of directors, shareholders, and stakeholders are just now learning of this arrangement to employ off-balance sheet accounting for the new office building and of managements profit arrangement from the new company.

An alternative to this arrangement would be a sale leaseback.

Explain to what extent the corporations shareholders might feel the corporation breached any measures of an entity of the highest ethical standards.

Explain to what extent the corporations board of directors might ever feel that management breached any measures of an entity of the highest ethical standards.