RegulationAccounting StandardsAnalysis: Herz’s departure could speed up convergence

Analysis: Herz's departure could speed up convergence

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

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The retirement of Robert Herz, head of the US standard setter, caught many off guard this morning.

Only last night, the respected head of the Financial Accounting Standards Board (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 US closer towards convergence of US and international accounting rules.

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

The fair value principle, which is at the heart of FASB’s financial instrument proposals, ravaged banks balance sheets as asset prices plummeted in falling markets during the crisis. Banks were forced to measure their loan-books at depressed market prices which obliterated much of their balance-sheet value.

Instead of loosening the rules, FASB, led by Herz, tightened them. Proposals currently on exhibition in the US may force US banks to record all their loans at fair value – a move they believe would add destructive volatility to their balance sheets.

In contrast the IASB’s mixed-measurement model, released in November, allows banks to measure some loans at fair value and others at cost. The two differing standards 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 their financial instruments proposal. His departure now leaves the board split 2-2. Significantly, he will be immediately replaced by Leslie Seidman, who dissented to FASB’s model and favours the IASB’s model. Herz’s departure could lead the FASB board deadlocked on the crucial standard.

Although the board will increase to seven next year, in the meantime she wil hold the balance of power when the fair value standard is decided – potentially before the new board structure comes into effect.

Perhaps Herz’s lasting impact for US markets may be triggered by his departure.

Further reading:

US standard setting chief to retire

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