IFRS – in the US Market

Michael P. Cangemi CPA, CISAPresident, Cangemi Company, LLCFormer CEO Etienne Aigner & FEI

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Business Career

Merrill Lynch/Blair&Co – High School&College Ernst & Young – CPA – Dir IT Audit Phelps Dodge – CAE – VP - CIO Professional work – IS Control Journal (87-07)

& Books - Managing the Audit (Wiley) BDO Seidman Ptr. IT Audit – IA Services CFO to CEO Etienne Aigner, Inc. CEO Financial Executives Intl Advisory Boards – Approva Corp; FASAC;

IASB; COSO; Pace University

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Why IFRS in the US

One word – Globalization !

Expansion of Global Capital Markets

Growth of Emerging Markets BRICs

(Brazil-Russia-India-China)

Creation of the EU

Growth of Capital Markets

Market Capitalization1970 - $841 Billion2002 - $17 Trillion 2007 -$59.8 Trillion

Related Issues:Significant Rise in Individual investors Expanding need for Companies to Raise

Capital

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World Market Capitalization

2007 2003

USA $18.7 T 31.3% USA $13.5 T 44.3%

Japan 4.7 8.0% Japan 3.1 10.4%

China 3.3 5.6% China .5 1.7%

Hong Kong 2.6 4.3% Hong Kong .7 2.3%

World $60 Trillion World $30.5 Trillion

(see article handout)

Shift in Capital Formation

2000 nine out of every ten dollars raised by foreign companies at NYSE

2005 nine out of every ten dollars raised by foreign companies at London or Luxembourg Exchange

Capital is Capital; company gets the $$US Expanded Regulation – SOX – Costs

and benefits

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Back to ? -Why IFRS in the US

Expansion of Global Capital MarketsGrowth of Emerging Markets BRICs

Continued:Creation of EU – they picked IFRSLack of respect for US – GAAPBenefits of a Common LanguageOne word - IE: Globalization

Steps Leading to SEC Road Map

Globalization of BusinessNorwalk Agreement - Sept 2002MOU – Feb 2006 – converge stds.Joint project to converge respective

Conceptual Frameworks

Goal -- one quality set of accounting standards used worldwide

Steps Leading to SEC Road Map

IFRS used or planned in over 100 countries – China; Japan to converge

Required in all EU countries in 2005Various implementations levels below

consolidated parent levelApproximately 40% of Global 500 use

IFRS (per D&T survey)

IFRS & US GAAP continue to converge

Steps Leading to SEC Road Map

November 2007 SEC - Elimination of Reconciliation to US GAAP for Foreign Filers

If they use IFRS – as adopted by IASB

Basically at this point the US accepts

IASB - IFRS !!!!!!

Update on SEC Roadmap to IFRS

Approved to issue for comment 8-27-08SEC Chairman Christopher Cox,

converge the “language of business and finance” and improve investor confidence in global markets through improved comparability and efficiencies.

IFRS as issued by the IASB is being judged as that high-quality

SEC - Key Success Factors

The standards must be crafted in the interest of investors;

The standards-setting process must be transparent;

The standards-setter must be independent; The standards-setter must be accountable;

and All stakeholders must participate in the

standards-setting process

SEC – Key Dates

Mandatory adoption of IFRS in 2014 and considers staged from 14 to16 based on company size

Considerations early adoption; optional basis for a limited group; for periods ending after 12/15/09

In 2011, sec will evaluate progress on the milestones and make a decision: to move ahead with the mandatory requirement to adopt IFRS in a future year (2014 or a subsequent time) or not at all.

Additional discussion points of note

IASB/FASB work plan for accounting convergence, will provide for converged and identical standards from the IASB and FASB in seven key subject areas (including revenue recognition) by 2011 (execution of this plan is critical in moving convergence forward)

LIFO Accounting: Staff indicated that the IRS is developing options for how to manage - IFRS does not permit LIFO accounting.

Need for a mindset change and the use of professional judgment in moving from U.S. GAAP to IFRS.

Principles Vs Rules Based

Per D&T 75% favor “principle based”Some say IFRS is just in early stages –

but – what I have seen: IASB allows more judgment – less emerging

issues rulingsHas a passion for principlesJust says no to rulings – says make up your

mind and disclose your issues & rational

Benefits of IFRS

Efficiency – one company would have one set of accounting standards – better internal reporting

Does not change with M & AFlexibility to raise capital where desiredImproved worldwide cash managementStreamlined efficient worldwide reportingBetter access to data for audit - CA

Benefits of IFRS -

IASB has appreciation for more diverse set of companies – and languages

ED - IFRS for Small & Medium-sized Entities (SME’s) – now called IFRS for Private Companies – ie: little GAAP - very well received!!!

Africa adopted the ED as GAAP! Proves the need

Challenges for IASB - IFRS

Funding – need stable sourceUS need to learn or Experience GapSovereignty & Enforcement Issues –

who is the regulator - IOSCO Credit Crisis testing these issues

Tax issues i.e.: no LIFOTechnology Infrastructure changesContracts- compensation agreements

Other - Financial Statements

FASB and IASB Discussion Paper on financial statement presentation Oct 15 2008

principle-based format that proposes tointroduce cohesiveness and disaggregation Cohesiveness would ensure that a reader can

follow the flow of information through the different statements of an entity

disaggregation would ensure that items that respond differently to economic events are shownseparately.

Recent Financial Market Crises

1980s Saving & Loan Bailout1987 Market drop and rapid recovery1998 Long-Term Capital failure & fallout9-11-2001 – terrorist attacks2001-02 - accounting scandals and

bankruptcy's2007-08 sub-prime induced dislocation

What is a Market?

Anything People want to Buy and Sell. Bubble Market – when trading is impacted by emotion rather than

reason. Frauds – when business managers think they are OWNERS!

Financial Scandals are not a new phenomena

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Discovery of America – New Land Schemes

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Madness of Crowds

The Tulip Bulbs Bubble 1600’s – emotional market ??

South Seas & Mississippi Companies – UK investors bet on America

1800-1900 Rail Roads Bubble1990’s Internet Bubble 2000’s corporate frauds leads to SOX!

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Expansion of Governance & Regulation

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Sub-Prime Malfeasance

A mortgage was a safe loanAdjustable rate mortgagesNo money down, interest onlyPackaged Mortgage Backed BondsPackages of Mort-Backed Bonds into

Collateralized Debt Obligations (CDO)House prices declined = crash!!!

Remember lots of Bad Guys

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Fair Value Accounting

Not the problem – actually the solution? (LCM) FASB-IASB issued guidance in reaction

BIGGER ISSUES is sovereignty and regulatory oversight of accounting; now

SEC to review Fair Value Accounting (90days) SEC agreed to allow issuers to delay write

downs on "perpetual preferred securities" that are showing paper losses.

Globalization on the move!

October 13th British Prime Minister Gordon Brown (who was previously U.K.’s Chancellors of the Exchequer) noted the importance of four key principles of market confidence: Transparency re: Disclosure of key information globally

through the adoption of internationally agreed-upon accounting standards.

Integrity: Focus on conflicts of interest, and base remuneration systems on long-term measures

Responsibility of Boards re: Effective management of risk Sound Banking Practice re: Solvency and Liquidity

PM Brown then called for a new financial architecture with more coordination amongst national regulators to better reflect the globalization of our financial markets. 

Closing Thoughts

SEC – next stepsCompanies fall into types – based on #

of IRFS subsBegin your process nowEstablish responsibility- project teamBegin with companies in countries that

adopted IFRS

Questions? Comments?

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Cangemi Company LLC

Senior Advisor & Board MemberConsulting –Financial & Governance Media -Managing the Audit Function;

speaking; teaching Book available at Amazon, Wiley and

other book sellersmpcangemi@msn.com

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