Before the implementation of IFRS 16 and ASC 842, operating leases were recorded as off-balance sheet transactions. Lessees simply recorded rental expenses in the income statement as they occurred, while billions in future contractual lease obligations were disclosed only in the footnotes.

This allowed companies to lower their reported debt levels, artificially improve their leverage metrics (Debt-to-Equity), and boost their Return on Assets (ROA) by omitting significant operational assets and liabilities from the face of the balance sheet.

Beyond basic operating leases, off-balance sheet financing historically relied on Special Purpose Entities (SPEs) and Variable Interest Entities (VIEs). Companies like Enron transferred impaired assets or liabilities to these unconsolidated entities to keep debt off the parent company’s balance sheet.

Modern consolidation and disclosure rules (IFRS 10 / ASC 810) mandate consolidation whenever an entity holds economic control or exposure to variable returns, regardless of equity share percentages.