What is the purpose of accounting defeasance in cash flow matching?

The purpose of accounting defeasance in cash flow matching is to remove assets and liabilities from the balance sheet. This process involves setting aside funds in a separate trust to pay off future liabilities, typically bonds. By doing so, an entity can effectively take the associated liabilities off its balance sheet, thus improving its financial position and cash flow management. The trust must hold high-quality securities that generate cash flows matching the payment schedule of the liabilities, ensuring that the obligations can be met while also allowing the liabilities to be excluded from the balance sheet. This is particularly useful for managing the financial metrics that investors and regulators consider important, such as debt-to-equity ratios.

In this context, improving liquidity of assets would not be the primary purpose of defeasance, as the assets are specifically moved into a trust and effectively earmarked for paying off the liabilities rather than enhancing liquidity. Increasing investment returns or decreasing regulatory oversight are also not goals of accounting defeasance, as its primary function is about matching cash flows and financial reporting rather than directly influencing returns or regulatory matters.