The third quarter is shaping up as a Waterloo for off balance sheet financing, and the cost to some individual companies looks substantial.

Even as the second-quarter earnings season rages, businesses are beginning to enumerate the cost of a post- Enron accounting rule that makes it harder for companies to keep assets and debts hidden in so-called special purpose entities.

In recent days, companies ranging from General Electric ( GE - Get Report) to satellite TV broadcaster Hughes Electronics ( GMH) to publishing concern Media General ( MEG) have said they will take noncash charges against third-quarter earnings because of the standard, which is called Fin 46. And the list is expected to grow as a September deadline for compliance approaches.

Big Shift

Fin 46 will force U.S. businesses to take millions of dollars in charges in the third quarter, while adding billions of dollars in assets and debts to their balance sheets. A Credit Suisse First Boston accounting analyst estimates that Fin 46 could move $400 billion in assets and debts to the balance sheets of S&P 500 companies.

So far, the company planning to take the biggest Fin 46-related charge is restaurant chain Ruby Tuesday ( RI). The company, which ended its fiscal year on June 3, expects a charge of between 60 cents to 62 cents a share as it consolidates a number of franchise partnerships onto its books.

Media General, the publisher of the Tampa Tribune and Richmond Times, will need a charge of 35 cents a share to consolidate several SPEs that had leased it real estate. Earlier this summer, networking giant Cisco Systems ( CSCO - Get Report) said it would take a noncash charge of up to $500 million because of Fin 46.

Broadly speaking, if a company bears most of the responsibility for the earnings or liabilities of an asset, it must carry it on its balance sheet. An exception had existed if an outside investor made a 3% equity investment in the asset. Fin 46 raises that bar to 10%.

Jabba the Hut

The new rule is intended to make it more difficult for businesses to act like Enron, which gussied up its corporate books by hiding billions of dollars in debt and ailing assets in SPEs. The Financial Standards Accounting Board, which enacted the measure in January, believes Fin 46 will make it harder for a company to find outside investors willing to fund an SPE when its sole purpose is to whitewash a company's balance sheet. (The rule technically refers to SPEs as "variable interest entities.")

Not every SPE that is being consolidated onto a company's books results in a charge against earnings.

Stephen Ryan, an accounting professor at New York University's Stern School of Business, said the charges are required if the SPE has embedded losses. In a sense, Fin 46 is starting to do what its supporters had hoped: make companies come clean about money-losing ventures that they had buried off balance sheet.

"The only reason consolidation should give rise to losses is because there is some loss that has been embedded in the SPE that hasn't been recognized," said Ryan. "What they are doing is recognizing any cumulative losses up until this point."

Of course, there's no guarantee that an SPE that has racked losses in the past won't keep losing money after consolidation, Ryan said.

The companies likely to be hardest hit by Fin 46 will be financial firms that rely on SPEs to sell a wide array of financial products ranging from asset-backed securities to commercial paper to credit derivative obligations. Finance firms use SPEs to administer these programs because it's a way of transferring some of the risk associated with these deals to other parties.

There's hope in the banking industry that most of these SPEs can be restructured before the end of September with additional dollars from outside investors. Indeed, Citigroup ( C) said recently that it anticipates restructuring (and thereby maintaining) a series of SPEs that hold up to $55 billion in assets and liabilities.

But not all banks will be as lucky as Citigroup, the nation's largest financial-services firm.

J.P. Morgan Chase ( JPM), the nation's second-largest bank, expects to add $26 billion in SPE assets and liabilities to its balance sheet in the current quarter. Wachovia ( WB) anticipates adding $10 billion to its balance sheet. Bank One ( ONE) is boosting its balance sheet assets and liabilities by $38 billion.

Fifth Third ( FITB), meanwhile, said it will consolidate an SPE that it uses for "certain consumer lease assets." The Cincinnati-based bank did not provide an estimate on the dollar value of the SPE.

Still Adding

So far, most of the banks that have commented on Fin 46 have not said whether they also will take a charge against earnings as they consolidate some of their SPEs in the third quarter.

One bank that does plan to take a charge is Ohio-based Huntington Bank ( HBAN). The bank will take a charge of $12 million, or 5 cents a share, to cover the impact of consolidating an SPE that the bank used to securitize $1 billion in automobile loans.

But that's not the only repercussion Fin 46 will have for Huntington Bank shareholders. In light of Fin 46, the bank said it doesn't expect to undertake any significant share buybacks in the near future, since its capital ratios will decline as a result of the SPE consolidation.

By contrast, Bank One, a much bigger bank, said Fin 46 "is not expected to have a material impact" on its capital ratios. Wachovia has said much the same, calling Fin 46 a "non-issue for us."

Maintaining a high capital ratio is important for a bank since it measures an institution's ability to absorb credit losses. Analysts pay a lot of attention to capital ratios, especially when banks are forced to write off a large number of bad loans in their portfolios. So it's a warning sign for investors when a bank says its capital ratios may suffer as a result of Fin 46.

This is not to say that Fin 46 will force any bank to the brink. But the changes wrought by Fin 46 may help investors ferret out which are the weakest players in the banking industry.