Accounting rulemakers have proposed a new standard that could gross up balance sheets with derivative assets and liabilities to the tune of some $7 trillion, according to an analysis by Credit Suisse.

In another step toward converged standards, the Financial Accounting Standards Board and the International Accounting Standards Board have published a joint proposal to spell out how companies should offset financial assets and financial liabilities in their balance sheets. Also known as “netting,” offsetting occurs when companies present their assets and liabilities with one another as a net amount rather than as separate assets and liabilities in the balance sheet.

Current rules for U.S. GAAP and International Financial Reporting Standards are different, making it difficult to compare financial statements prepared under different rules. Credit Suisse says GAAP allows much more netting than IFRS, giving U.S. companies generally smaller balance sheets.

The firm estimates among the Standard & Poor's 500, if there were netting, it would bring nearly $7 trillion in off-balance-sheet derivative assets and liabilities onto U.S. balance sheets, increasing assets by 26 percent and liabilities by 33 percent. Credit Suisse notes the proposed standard doesn't eliminate netting entirely, but raises the threshold for when netting will be permitted; as such, the $7 trillion estimate is a worst-possible scenario.

The proposal says offsetting should be applied only when the right to set off a given asset with a given liability, as in a derivative contract, is enforceable at all times, including through default or bankruptcy. Further, offsetting would only be allowed when the ability to exercise that right is not conditional based on some future event and when the entities involved intend to settle the legally linked asset and liability with a single payment or simultaneously.

FASB and IASB said the accounting differences between U.S. GAAP and IFRS with respect to netting result in the single largest difference, dollar for dollar, between financial statements prepared under GAAP vs. IFRS. Even the Group of Twenty nations and the Financial Stability Board have joined preparers and users of financial statements to call for a single approach across both sets of accounting rules.

The balance sheet bulk-up predicted by Credit Suisse would be highly concentrated among the financial services giants—namely Bank of America, Citigroup, Goldman Sachs, JP Morgan, and Morgan Stanley, Credit Suisse says. The effect for companies most heavily affected is likely a decrease in return on assets and an increase in reported leverage, leading to a negative impact on the leverage ratio used by banking regulators.

FASB has published a brief summary of the proposal to further explain the rationale. The board is accepting comments on the proposal through April 28.

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