IFRS

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IFRS in the US Market

• Michael P. Cangemi CPA, CISA
• President, Cangemi Company, LLC
• Former CEO Etienne Aigner FEI

Management, IT, Financial Governance
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Cangemi Company, LLC
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Business Career

• Merrill Lynch/BlairCo High SchoolCollege
• 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

Management, IT, Financial Governance
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Cangemi Company, LLC
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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

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Growth of Capital Markets

• Market Capitalization
• 1970 - 841 Billion
• 2002 - 17 Trillion 2007 -59.8 Trillion
• Related Issues
• Significant Rise in Individual investors
• Expanding need for Companies to Raise Capital

Management, IT, Financial Governance
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Cangemi Company, LLC
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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 60 Trillion World 30.5 Trillion 30.5 Trillion
(see article handout) (see article handout) (see article handout)
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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

Management, IT, Financial Governance
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Cangemi
Company, LLC
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Back to ? -Why IFRS in the US

• Expansion of Global Capital Markets
• Growth of Emerging Markets BRICs
• Continued
• Creation of EU they picked IFRS
• Lack of respect for US GAAP
• Benefits of a Common Language
• One word - IE Globalization

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Steps Leading to SEC Road Map

• Globalization of Business
• Norwalk Agreement - Sept 2002
• MOU Feb 2006 converge stds.
• Joint project to converge respective Conceptual
  Frameworks
• Goal -- one quality set of accounting standards
  used worldwide

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Steps Leading to SEC Road Map

• IFRS used or planned in over 100 countries
  China Japan to converge
• Required in all EU countries in 2005
• Various implementations levels below consolidated
  parent level
• Approximately 40 of Global 500 use IFRS (per DT
  survey)
• IFRS US GAAP continue to converge

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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 !!!!!!

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Update on SEC Roadmap to IFRS

• Approved to issue for comment 8-27-08
• SEC 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

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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

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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.

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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.

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Principles Vs Rules Based

• Per DT 75 favor principle based
• Some say IFRS is just in early stages but
  what I have seen
• IASB allows more judgment less emerging issues
  rulings
• Has a passion for principles
• Just says no to rulings says make up your mind
  and disclose your issues rational

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Benefits of IFRS

• Efficiency one company would have one set of
  accounting standards better internal reporting
• Does not change with M A
• Flexibility to raise capital where desired
• Improved worldwide cash management
• Streamlined efficient worldwide reporting
• Better access to data for audit - CA

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Benefits of IFRS -

• IASB has appreciation for more diverse set of
  companies and languages
• ED - IFRS for Small Medium-sized Entities
  (SMEs) now called IFRS for Private Companies
  ie little GAAP - very well received!!!
• Africa adopted the ED as GAAP! Proves the need

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Challenges for IASB - IFRS

• Funding need stable source
• US need to learn or Experience Gap
• Sovereignty Enforcement Issues who is the
  regulator - IOSCO
• Credit Crisis testing these issues
• Tax issues i.e. no LIFO
• Technology Infrastructure changes
• Contracts- compensation agreements

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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.

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Recent Financial Market Crises

• 1980s Saving Loan Bailout
• 1987 Market drop and rapid recovery
• 1998 Long-Term Capital failure fallout
• 9-11-2001 terrorist attacks
• 2001-02 - accounting scandals and bankruptcy's
• 2007-08 sub-prime induced dislocation

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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

Management, IT, Financial Governance
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Cangemi
Company, LLC
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Discovery of America New Land Schemes
Management, IT, Financial Governance
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Cangemi
Company, LLC
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Madness of Crowds

• The Tulip Bulbs Bubble 1600s emotional market
  ??
• South Seas Mississippi Companies UK investors
  bet on America
• 1800-1900 Rail Roads Bubble
• 1990s Internet Bubble
• 2000s corporate frauds leads to SOX!

Management, IT, Financial Governance
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Cangemi Company, LLC
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Expansion of Governance
Regulation
Management, IT, Financial Governance
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Cangemi
Company, LLC
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Sub-Prime Malfeasance

• A mortgage was a safe loan
• Adjustable rate mortgages
• No money down, interest only
• Packaged Mortgage Backed Bonds
• Packages of Mort-Backed Bonds into Collateralized
  Debt Obligations (CDO)
• House prices declined crash!!!

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Remember lots of Bad Guys
Management, IT, Financial Governance
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Cangemi
Company, LLC
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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.

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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. 

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Closing Thoughts

• SEC next steps
• Companies fall into types based on of IRFS
  subs
• Begin your process now
• Establish responsibility- project team
• Begin with companies in countries that adopted
  IFRS

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Questions? Comments?
Management, IT, Financial Governance
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Cangemi
Company, LLC
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Cangemi Company LLC

• Senior Advisor Board Member
• Consulting Financial Governance
• Media -Managing the Audit Function speaking
  teaching
• Book available at Amazon, Wiley and other book
  sellers
• mpcangemi_at_msn.com

Management, IT, Financial Governance
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Cangemi
Company, LLC