Robert Herz says he is retiring early as chairman of the Financial Accounting Standards Board, and at the same time FASB’s overseer is planning to restore two board seats it eliminated only two years ago, altering the composition of the board midway through a critical shakeup in U.S. accounting rules.

Herz offered no reason for leaving his post after eight years, just as FASB is proposing significant changes that would close the biggest gaps between U.S. and international accounting standards. Herz was appointed to a five year-term July 1, 2002, and reappointed for a second term that would have expired June 30, 2012. FASB member Leslie Seidman will take over as acting chairman effective Oct. 1.

The Financial Accounting Foundation also decided it will expand the five-member FASB by appointing two new members by early 2011. FASB operated with seven board members from its inception in 1973 until FAF eliminated two seats in 2008, expecting the smaller size to make the board more nimble.

FAF Chairman Jack Brennan said in a statement the return to a seven-member structure will “enhance the FASB’s investment” in its agenda with the International Accounting Standards Board to converge U.S. and international accounting standards. The expansion will also address “the unprecedented challenges facing the American capital markets in the months and years ahead,” said Brennan.

FASB has issued a number of major – and in many ways controversial – proposals in recent weeks to dramatically alter some fundamental principles in U.S. GAAP. Most of them are driven by the goal to converge U.S. and international accounting rules, to help create a more common financial reporting platform across major capital markets of the world.

Perhaps most contentious is a plan to require banks to report more of their financial instruments at fair value. However, even FASB and IASB couldn’t entirely agree on a new accounting standard, so each board is pursuing separate approaches. FASB’s proposal, published in late May with comments continuing through Sept. 30, was approved by only three of FASB’s current five members.

Herz was one of three board members who supported the proposal, but Seidman and fellow board member Lawrence Smith offered an alternative view that called into question the extent to which the standard would require fair value. The two board members thought in some cases, banks should be allowed to report more of their long-term instruments based on the cash flow they would produce rather than a hypothetical current market value.

Herz took a bruising from Congress at the peak of the financial crisis when members of Congress threatened legislative measures to make some bank-friendly modifications to fair-value requirements. In response, FASB rushed through guidance to allow banks to record some of their most troubled instruments through other comprehensive income rather than reporting losses directly through the income statement.

David Larsen, managing director for financial advisory firm Duff & Phelps and a member of FASB’s Valuation Resource Group, said he had no inside information on Herz’s unsignaled early retirement plans, but the timing raises interesting questions about the future of financial instrument accounting. “Will the financial instruments project be delayed until the new board members come on?” he wondered aloud. “What does this mean?”

He’s also curious about the impact on the convergence movement more broadly. FASB set an aggressive timeline along with the IASB to finalize a host of major new standards by mid-2011, in part to facilitate a decision by the Securities and Exchange Commission on whether and how the United States would eventually switch over to international standards.

SEC Chairman Mary Schapiro published a statement thanking Herz for his service and commending the FAF for increasing FASB’s size from five to seven board members. Brennan also commended Herz for “his strong leadership of FASB in, arguably, the most challenging period in its history.”