A couple of days ago the FASB issued a proposal to limit netting/offsetting. The proposal is similar to the IASB’s current approach. Therefore, if it is finalized, companies in the United States would not be allowed to offset as many assets and liabilities (especially derivatives) as they do now, meaning larger balance sheets.

David Zion and his team at Credit Suisse estimate that that the companies in the S&P 500 could bring up to $6.9 trillion and $6.8 trillion of off-balance sheet derivatives assets and liabilities on the balance sheet, increasing assets by 26% and liabilities by 33%. They indicate that the amounts are highly concentrated among five companies – – Bank of America, Citigroup, Goldman Sachs, J.P. Morgan, and Morgan Stanley. (Source: Grossing up the balance sheet. Credit Suisse. January 28, 2011. By David Zion, Amit Varshney, and Nichole Burnap).

I’m glad that the FASB is now addressing this issue. This area has always been a big sinkhole, in my opinion, especially when trying to explain to students why we do something here but not there. I’ve also been always perplexed about why netting should be allowed to begin with – – let’s go back to the conceptual framework – – what concept is that that allows this netting? What does anybody else think about the gross versus net distinction?