Lisa Chapman, Big4.com
25 August 2010
(blog) We saw it yesterday buzzing around in the news, and also confirmed by the Financial Accounting Standards Board (FASB) that its current chairman Robert Herz is retiring on his own accord almost two years before the end of his term, much to the surprise of the industry, the Board and the Financial Accounting Foundation (FAF). Robert H. Herz was appointed FASB chairman on July 1, 2002, and was reappointed to a second term effective July 1, 2007 for a 5 year term. Previously, he was a senior partner with PricewaterhouseCoopers.
Leslie Seidman has been appointed Acting Chairman, effective October 1, 2010. Ms. Seidman started her career as an auditor in the New York office of Arthur Young & Company (now Ernst & Young LLP) and is a CPA.
In other developments, The Board of Trustees of the Financial Accounting Foundation (FAF) today announced that the will grow from five to seven members. From 1973 until 2008, it had 7 members and then got reduced to 5 last two years before it goes up again.
So, a lot happening over at the FASB in the course of one evening!
One of the significant changes supported by Mr. Herz was the “fair value” model for reporting of financial assets, which we covered comprehensively in our previous blog post:
And we said there,
“The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) undertook a joint project in late 2008 to look at all accounting aspects for financial instruments, with a view to improving the usefulness and increasing the consistency of financial instrument reporting through simplification and convergence of the current US and international accounting models.
While jointly begun, the IASB and FASB have moved to different end points. The FASB has been more radical in suggesting a complete change – in that all financial instruments should be reported at fair value, including bank loans and deposits. On the other hand, the IASB preferred to stay in line with current reporting guidelines – in that instruments to be held for the longer term be reported at amortized cost, and those held for the shorter term be reported at fair value.
The FASB would like to present all financial instruments at fair value in the balance sheet and include that measure in the determination of GAAP equity. (the “fair value” model). Net income would continue to be based on amortized cost for longer term instruments and fair value for shorter term instruments. Any periodic differences between amortized cost and fair value for longer term instruments would be booked as other comprehensive income. The FASB also requires presenting financial instruments at amortized cost on the balance sheet supplementally, thus providing investors both sets of information for their analysis. Some argue that the advantage of reporting assets at fair value is that it incorporates all market information, not just management’s opinion; and it can be an early warning system when markets are trending down.
PwC’s survey reveals….But one theme dominates – investors responding to this survey generally prefer the mixed model, since they indicated that it better reflects how the institution is thinking about the asset. They tend to use amortized costs in their analysis for future cash flow predictions.”
Yes, the PwC survey indicated that investors, and many banks prefer the IASB’s version of the “mixed measurement” model more than the drastic change required by the FASB’s “fair value” model.
With the surprise departure of Mr. Herz, his crucial swing vote for the “fair value” model drops off, leaving Ms. Seidman with the power to influence her choice, the “mixed measurement” model, much to the delight of US banks, who much prefer this approach. Mr. Herz’s departure leaves the leaves the board split 2-2, and Ms. Seidman, who dissented to FASB’s model and favours the IASB’s model will now as acting chairman, have the crucial casting vote to swing the board quickly before the board again increases its size to seven members.
Mr. Herz’s departure is being widely speculated, as his term was marked by intended and then modified changes to the “mark to market” rule, which the FASB proposed and then had to back-down due to intense pressure from banks, investors and politicians.
In any case, this departure brings back the focus to new standards, and how this all plays out with a new Chairman and an expanded board will be an interesting story, with many twists and turns. (blog)