Mario Christodoulou, Accountancy Age, Wednesday 25 August 2010 at 14:22:00

US standard setter's surprise departure could influence the future of fairvalue accounting


Theretirementof Robert Herz, head of the US standard setter, caught many offguard this morning.

Only last night, the respected head of the Financial Accounting StandardsBoard (FASB) was negotiating with the International Accounting Standards Board(IASB) as the two boards attempt to converge their two accounting codes.

While the reasons for his departure remain unclear, the move may steer the UScloser towards convergence of US and international accounting rules.

Herz, who was due to step down in 2012, has been under pressure from banks toabandon unpopular reforms to financial instruments accounting, which has beencomplicating attempts to converge US and international accounting rules.

The fair value principle, which is at the heart of FASB?s financialinstrument proposals, ravaged banks balance sheets as asset prices plummeted infalling markets during the crisis. Banks were forced to measure their loan-booksat depressed market prices which obliterated much of their balance-sheet value.

Instead of loosening the rules, FASB, led by Herz, tightened them. Proposalscurrently on exhibition in the US may force US banks to record all their loansat fair value ? a move they believe would add destructive volatility to theirbalance sheets.

In contrast the IASB?s mixed-measurement model, released in November, allowsbanks to measure some loans at fair value and others at cost. The two differingstandards proved a significant obstacle as the two boards attempted to converge,however Herz?s departure may finally break the impasse.

Herz was one of three on the five member FASB board to support theirfinancial instruments proposal. His departure now leaves the board split 2-2.Significantly, he will be immediately replaced by Leslie Seidman, who dissentedto FASB?s model and favours the IASB?s model. Herz's departure could lead theFASB board deadlocked on the crucial standard.

Although the board will increase to seven next year, in the meantime she wilhold the balance of power when the fair value standard is decided - potentiallybefore the new board structure comes into effect.

Perhaps Herz's lasting impact for US markets may be triggered by hisdeparture.

Further reading:

USstandard setting chief to retire