Off-Balance-Sheet Equipment Financing and IFRS 16, Explained

For years, leasing was a way to use expensive equipment without showing the debt for it. Sign an operating lease, and the asset and the obligation stayed off your balance sheet; only the rental expense appeared. IFRS 16 closed most of that gap. Understanding what is left matters if you care about your borrowing capacity and the ratios your lenders watch.

What "off-balance-sheet" actually means

When financing is off-balance-sheet, you use an asset without recording it — and without recording the matching liability. The payments run through the income statement as an operating expense. Your reported debt stays lower, which protects measures like gearing, interest cover and return on assets.

That can be the difference between staying inside a loan covenant and breaching it, or between one credit rating band and the next.

What IFRS 16 changed

IFRS 16 introduced a single lessee model. For almost every lease longer than 12 months, you now recognise:

• A right-of-use asset — your right to use the equipment for the term.
• A lease liability — the present value of the future payments.

The old "operating lease = off-balance-sheet" shortcut no longer works for lessees. If you control the use of an identified asset for a period in exchange for payment, it is a lease, and it generally goes on the books.

What still qualifies as off-balance-sheet

The standard kept two practical exemptions, plus one structural route:

1. Short-term leases. Terms of 12 months or less, with no purchase option, can be kept off-balance-sheet and expensed.
2. Low-value assets. Leases of inherently low-value items can be exempted regardless of term.
3. Service contracts, not leases. If you are buying an outcome rather than the right to use a specific asset, it is a service, not a lease. A contract where the provider can swap the machine, controls how it is operated and bears the performance risk does not create a right-of-use asset.

This is why genuine short-term rental remains the cleanest off-balance-sheet route for equipment. You pay for use, the supplier keeps the asset and its risks, and nothing lands on your liabilities.

Why this matters for equipment-heavy businesses

Industries like shipbuilding, ports and construction tie enormous capital up in machines that are only used part of the year. Keeping that capital free — and the associated debt off the books — lets you invest in work that actually generates returns. The trade-off is that off-balance-sheet access usually costs more per unit of time than owning, so the decision is a balance between flexibility and lifetime cost.

If the classification turns on whether your arrangement is an operating or finance lease, read operating lease vs finance lease. To compare the real cash cost of each route for your equipment, use the rent vs lease vs buy calculator.

None of this is a substitute for advice on your specific accounts — confirm the treatment with your auditor before relying on it.