FASB Mark to Market

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Testimony ofRobert H. HerzChairmanFinancial Accounting Standards Boardbefore theU.S. House of Representatives Financial Services SubcommitteeOn Capital Markets, Insurance, and Government Sponsored EntitiesMarch 12, 2009Full Text of Testimony

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Introduction

Chairman Kanjorksi, Ranking Member Garrett, and Members of the Subcommittee:I am Robert Herz, chairman of the Financial Accounting Standards Board (“FASB” or“Board”). Thank you for inviting me to participate in today’s important hearing.I have brief prepared remarks and would respectfully request that the full text of mytestimony and all supporting materials be entered into the public record.My testimony this morning includes a brief overview of the FASB, including theimportance of our independence and due process to our mission of developing high-quality financial accounting and reporting standards for both public and privateenterprises. My testimony also describes the differing roles of accounting standardsetters and prudential regulators, discusses the concepts of fair value accounting andmeasurement, provides some observations on recent calls to suspend the application of fair value accounting, summarizes research on the impact of fair value accounting onfinancial institutions, explains the purpose and provisions of FASB Statement of Financial Accounting Standards No. 157,

Fair Value Measurements

(“Statement 157”)

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and reviews some of the issues surrounding the application of this standard and how theBoard has been addressing those issues.

The FASB

The FASB is an independent private-sector organization. Our independence fromenterprises, auditors, and other constituents is fundamental to achieving our mission—toestablish and improve general-purpose standards of financial accounting and reporting forboth public and private enterprises. Those standards are essential to the efficientfunctioning of the U.S. economy because investors, creditors, and other users of financialreports rely heavily on credible, transparent, comparable, and unbiased financialinformation to make rational resource allocation decisions.

2The FASB’s independence, the importance of which was reaffirmed by the Sarbanes-Oxley Act of 2002 (“Act”),

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is a critical aspect of the standard-setting process andfundamental to our mission, because our work is technical in nature and designed toprovide preparers with the guidance necessary to report information about their economicactivities. The guidance creates the yardstick to measure and report on the underlyingeconomic transactions of business enterprises. Like investors and creditors, Congressand other policy makers need an independent FASB to maintain the integrity of aproperly designed yardstick in order to obtain the financial information necessary toappropriately assess and implement the public policies they favor. While bending theyardstick to favor a particular outcome may seem attractive to some in the short run, inthe long run an inaccurate yardstick (or a biased accounting standard) is harmful toinvestors, creditors, and the U.S. economy.The FASB’s authority with respect to public enterprises comes from the U.S. Securitiesand Exchange Commission (“SEC” or “Commission”). The SEC has the statutoryauthority to establish financial accounting and reporting standards for publicly heldenterprises. For 35 years, the SEC has looked to the FASB for leadership in establishingand improving those standards. The SEC issued a Policy Statement in 2003 reaffirmingthis longstanding relationship.

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The Policy Statement, consistent with the language and intent of the Act,

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alsoreemphasizes the importance of the FASB’s independence described earlier.

It states:By virtue of today’s Commission determination, theFASB will continue its role as the preeminent accountingstandard setter in the private sector. In performing thisrole, the FASB must use independent judgment in settingstandards and should not be constrained in its explorationand discussion of issues. This is necessary to ensure thatthe standards developed are free from bias and have the

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Sarbanes-Oxley Act of 2002, Public Law Number 107-204, Sections 108-109 (July 30, 2002).

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Policy Statement: Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter,Exchange Act Release Nos. 33-8221; 34-47743; IC-26028; FR-70 (April 25, 2003).

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Sections 108-109; the legislative history of the Act is clear that the provisions of the Act relating to theFASB were intended to “strengthen the independence of the FASB . . . from . . . companies whose financialstatements must conform to FASB’s rules.” Senate Report 107-205, 107

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Congress, 2d Session (July 3,2002), page 13.

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