The Adaptation of Off-Balance Sheet Financing Techniques in Leasing after the Financial Crisis

Project Start:07/2014
Researchers:Matthias Thiemann
Category: Financial Intermediation
Funded by:LOEWE

Topic & Objectives

A distorted assessment of risk, based upon misleading credit ratings, was one of the main causes of the financial crisis. One mechanism responsible for biased credit ratings is off-balance-sheet financing techniques, used by corporations and banks to optimize balance sheets in order to increase credit ratings. The market for leasing is one of these markets which still offers the opportunity to increase de facto indebtedness without impacting the equity ratio despite regulatory initiatives. The central objective of this research project was to understand how the leasing industry and its regulatory advisors mitigate the impact of regulatory initiatives and reconfigure their offer to corporations to maintain attractive off-balance-sheet treatment. 

Key Findings

  • The lease industry was not able to stop the International Financial Reporting Standards 16 (IFRS 16), however, lobbied successfully against the upcoming lease accounting standard in order to create regulatory loopholes. Due to this, individually designed lease agreements may continue to be designed off-balance sheet (at least a portion of it).
  • Our research indicates that the demarcation between lease and service contracts combined with the so-called “portfolio approach” as well as the bright-line to low-value assets will be in the center of this structuring process. While the majority of agreements defined as leases will be recognized under IFRS 16, service contracts are still off-balance sheet.
  • We could trace the path through which the lease industry has been able to prevent the implementation of the first International Accounting Standards Board (IASB) exposure draft leases (ED/2010/09). In particular, we reconstructed the channel through which the lease industry was able to persuade the European Financial Reporting Advisory Group (EFRAG).
  • The emergence of the German lease accounting frame (“Leasingerlasse”) in the early 70s was subject to intense lobby work. The resulting explicit quantitative bright-lines of the “Leasingerlasse” guaranteed the off-balance-sheet status of lease agreements under German Generally Accepted Accounting Principles (GAAP). This bright-line approach is still operational in Germany, thereby, allowing companies using the German Commercial Code (HGB) to maintain an off-balance-sheet status of their leasing engagements.
  • Our results provide evidence that academic literature impact accounting standard-setting processes in Germany.

Policy Implications


Regulators or standard setters need to be aware that they not only face a given financial industry itself but also an entire web of think tanks and academics producing specific academic literature in favor of the industry. Those publications may indirectly strongly affect the drafting and formulation of accounting rules, potentially hampering regulatory attempts to end rule evasion in a very early stage.   

Related Published Papers

Author/sTitleYearProgram AreaKeywords
Jan FriedrichThe Effect of Academic Literature on Accounting Regulation: Evidence from Leases in Germany
Accounting History Review
2019 Financial Intermediation
Jan Friedrich, Matthias ThiemannDrawing the Line: The Political Economy of Off-Balance Sheet-Financing
2016 Financial Intermediation

Related Policy Publications

Jan Friedrich,
Matthias Thiemann
Why the Initial Regulation of Financial Innovations is Decisive − Regulatory Arbitrage and Off-Balance-Sheet Leasing in Germany
Policy Letter No. 69