We said in the lecture on asset definition that valuable intangible assets such as brands and talents do not appear in the assets in the statements because they are difficult to quantify and do not meet the recognition requirements of accounting standards.

These assets are called off-balance sheet assets.

Similarly, some corporate debts do not appear in the liabilities of the statement because they do not meet the recognition requirements of accounting standards. We call them off-balance sheet liabilities.

These off-balance sheet liabilities are like the part of the iceberg hidden underwater. They are calm on weekdays, but once they explode, they are like the Titanic's misfortune, which will have a devastating blow to the enterprise.

For example, in the Enron incident we mentioned, small and medium-sized shareholders suffered huge losses because of hidden debts.

Therefore, if you want to understand the true situation of a company, it is very important to understand its off-balance sheet liabilities.

However, off-balance sheet liabilities are complex and hidden, and even many professionals cannot understand them.

Survey data shows that only 10.5% of accountants have a good understanding of off-balance sheet liabilities, and as many as 23.3% have no idea at all.

? In this lecture, we will talk about what common off-balance sheet liabilities companies have, so that we can give you a comprehensive understanding of a company's debt risks.

Let’s first look at the circumstances under which off-balance sheet liabilities will be formed. There are usually three situations: 1. Hidden liabilities that naturally arise during operations; 2. Deliberately hidden liabilities; 3. Off-balance sheet financing liabilities.

Next let’s talk about them one by one.

The first is the implicit liability arising from the operating characteristics of the enterprise. For example, if a chemical enterprise has soil contamination due to the leakage of harmful chemical substances during its operations, the enterprise needs to bear the obligation to purify it.

This kind of environmental liability is the largest type of hidden liability for chemical companies.

This kind of liability is different from the liability arising from corporate financing activities (such as bank loans).

Liabilities arising from financing activities usually have clear repayment time and amounts, but implicit liabilities arising from operations are like a "bomb". It is uncertain at what point in time it will explode in the future, and how powerful it will be once it explodes.

, so it cannot be measured and recognized in accounting, so it can only be placed off the balance sheet.

When financial experts evaluate a company's liabilities, they not only look at the liabilities caused by the company's financing activities, but also pay special attention to the hidden liabilities that may be contained in the company's actual operations.

If hidden liabilities are serious, they can even bring down a company.

For example, ABB is a well-known European electrical appliance company with more than 200,000 employees at its peak. It once ranked 68th among the world's top 500 companies.

ABB has invented dozens of major technologies that have changed mankind, such as the world's first high-voltage direct current transmission line and the world's first industrial robots.

What did ABB rely on to grow rapidly?

Relying on a large number of mergers and acquisitions activity.

The company itself was formed in 1988 through the merger of a Swedish company and a Swiss company.

The two companies complemented each other and developed rapidly after the merger.

After tasting the benefits of the merger, the new company continued to expand its territory everywhere.

At that time, the company's morale could be said to be high, and every employee and investor was looking forward to greater development of ABB.

Until December 1989, ABB acquired a company called American Combustion Engineering, which mainly manufactured boilers for refineries and petrochemical companies.

No one expected that what was originally an ordinary acquisition would bring the biggest disaster in ABB's development history, putting it on the verge of bankruptcy.

What happened?

It turns out that when ABB did due diligence before the acquisition, it only did financial due diligence, but failed to discover an important hidden danger in the company's operations, that is, the company's boiler products used asbestos containing carcinogens as heat insulation.

Material.

Later, employees and customers who had been exposed to this type of boiler experienced adverse physical reactions, so they filed a class action lawsuit against ABB, with as many as 100,000 plaintiffs.

ABB paid US$865 million in compensation, but the lawsuit did not end with compensation.

Although ABB sold American Combustion Engineering to Alstom at a low price in 2000, it still retained relevant liability for compensation.

The sky-high compensation fees involved in this lawsuit caused ABB to suffer a huge loss of US$691 million in the second year, and was in danger of bankruptcy.

Later, ABB promised to establish a trust fund of US$1.2 billion as a compensation guarantee, and in exchange for the plaintiff agreeing to the bankruptcy of American Combustion Engineering, the lawsuit was finally settled.

You see, when a company is acquired, if the implicit liabilities of the target company are ignored, how much risk will it bring to the buyer's company.

This type of implicit liabilities is usually related to the operating characteristics of the company.

For example, the biggest hidden liability of airlines is lawsuits and compensation caused by air crashes.

The largest hidden liability in the chemical, coal, materials, and mining industries is environmental liability.

An implicit liability that China Shenhua Co., Ltd. has voluntarily disclosed in its financial statements is the "land reclamation obligation." That is to say, after completing mining activities, the company must repair the damaged land.

However, since each piece of land is in a different environment and situation, it is difficult to estimate in advance how long it will take and how much it will cost to repair. Financially, it is impossible to include this future expenditure in the report.

Therefore, when investors evaluate China Shenhua's debt level, they must estimate its hidden debt based on the company's operating characteristics.