Keep those comment letters coming.

For bankers who worry that accounting rulemakers are moving too far, too fast with a proposal to expand the use of fair value, just about the only clear inference that can be drawn from this week's shake-up at the Financial Accounting Standards Board is that the public comment period on the board's suggestions has taken on new significance.

The surprise retirement of FASB Chairman Robert Herz and new plans to expand the board by two members introduce all sorts of variables into an equation that will determine how banks ultimately are directed to account for loans and deposits.

On the one hand, Herz's departure, coming two years before the end of his contract, threatens the fragile majority with which the five-member board has agreed to pursue several controversial rule changes regarding fair value. And Leslie Seidman, the board member and former bank executive who takes over as acting chairman on Oct. 1, was among the dissenters in those key, 3-to-2 votes.

On the other hand, though the FASB will wait until early 2011 to add two new board seats, a spokesman for the board said Wednesday that the seat left vacant by Herz would be filled by the time he departs. Depending on who is selected by the trustees of the foundation overseeing the FASB, the majority that Herz helped create could be preserved.

"It all depends on who they choose, because the vote is so close," said Donna Fisher, a senior vice president at the American Bankers Association. "It seems like the entire bank industry is going to be on the edge of its seat, waiting to see who the new person is."

Meanwhile, it is unclear whether the board would move ahead on such a crucial issue before the two additional board seats are filled. Also unknown is whether current board members have been, or will be, moved to change their positions since the FASB formally proposed on May 26 that all financial instruments be recorded at fair value on the balance sheet.

The public comment period on the draft rule expires Sept. 30. On Thursday, the FASB is scheduled to begin a series of bank visits arranged by the ABA so that the accounting standard-setters can get a sense of the operational effects of the rules they have proposed. Fisher said the ABA helped coordinate four such field visits planned through late September.

Sydney Garmong, an executive in the financial services practice at the Crowe Horwath LLP accounting firm, said that between the comment letters and the site visits she expects the board to be swayed at least somewhat.

"This proposal is very unpopular, and I think the board acknowledged that it would be," Garmong said. "If they listen to what the preparers are saying, and consider the operational issues, it does not feel like [the proposal] would go through."

If adopted as proposed, the new rules would force banks to value unfunded loan commitments and loans they plan to hold to maturity in the same way they currently value loans they intend to sell. The proposal also calls for fair-value treatment of deposits.

Though simmering for years, the fair-value debate reached a full boil during the credit market meltdown of 2008 inflamed passions on both sides of the issue. Proponents of fair value questioned the marks that banks were taking based on the amortized-cost method typically applied to loans that are held to maturity, and opponents of fair value accused the FASB of worsening the financial system's reported losses.

Testifying before a House subcommittee in 2009, Herz was pushed by several representatives to relax rules for marking assets to market. When he moved to do so, he was criticized for allowing politics into the cloistered environment in which the FASB typically works.

"It's a tough job," said Dennis Beresford, the University of Georgia accounting professor who was chairman of the FASB from 1987 to 1997. "There's always a lot of pressure, but Bob has had more than I had. I only had to testify [to Congress] twice, and they were both about very obscure things."

A spokesman for the FASB, Neal McGarity, said Herz's decision to retire stemmed from "a combination of factors ranging from professional to personal."

In view of the board projects left in the balance — the FASB is trying to make othermajor changes in addition to fair value rules — news of Herz's retirement shocked the accounting world.

David Larsen, a managing director at Duff & Phelps, drew an analogy to the game-changing impact that Michael Jordan's retirement had on the sport of basketball.

"In the world of accounting, it's kind of like that," Larsen said.

But as the FASB moves to replace Herz and expand its ranks, it may be the Supreme Court, not the basketball court, that comes to mind. Could fair value be a litmus test for board candidates considered by the foundation that oversees the FASB?

How will new board members align themselves?

And what kind of influence might Seidman — an accounting policy vice president at J.P. Morgan & Co. in the 1990s, and the only ex-bank executive now on the board — exert?

The intent of the expansion "is to make it more difficult to reach consensus, particularly on changes that are more radical or extreme versus current practice," said Mark Mycio, who is chairman of the accounting standards committee at the New York State Society of Certified Public Accountants.

The FASB had been expecting by the second quarter of 2011 to complete its plan to apply fair value to all financial instruments. If the board waits until all seven members are in place — and it remains unclear that it would — fair-value opponents may get some kind of reprieve. But with so much at stake, banks presumably are hesitant to jump to conclusions.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.