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
Business Career
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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
Management, IT, Financial Governance
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Cangemi Company, LLC
Why IFRS in the US
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One word – Globalization !
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Expansion of Global Capital Markets
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Growth of Emerging Markets BRICs
(Brazil-Russia-India-China)
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Creation of the EU
Growth of Capital Markets
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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
World Market Capitalization
2007
USA
$18.7 T 31.3%
2003
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
(see article handout)
World
$30.5 Trillion
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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Management, IT, Financial Governance
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Cangemi Company, LLC
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
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Various implementations levels below
consolidated parent level
Approximately 40% of Global 500 use
IFRS (per D&T 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
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Basically at this point the US accepts
IASB - IFRS !!!!!!
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
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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
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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
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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:
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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 (SME’s) – 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
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Credit Crisis testing these issues
Tax issues i.e.: no LIFO
 Technology Infrastructure changes
 Contracts- compensation agreements
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Other - Financial Statements
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FASB and IASB Discussion Paper on financial
statement presentation Oct 15 2008
 principle-based format that proposes to
introduce cohesiveness and disaggregation
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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 shown
separately.
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?
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Anything People want to Buy and Sell.
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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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Cangemi Company, LLC
Discovery of America – New Land Schemes
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Cangemi Company, LLC
Madness of Crowds
The Tulip Bulbs Bubble 1600’s –
emotional market ??
 South Seas & Mississippi Companies –
UK investors bet on America
 1800-1900 Rail Roads Bubble
 1990’s Internet Bubble
 2000’s corporate frauds leads to SOX!
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Cangemi Company,
Expansion of Governance
& Regulation
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Cangemi Company, LLC
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
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Cangemi Company, LLC
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!
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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:
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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 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
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@msn.com
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Management, IT, Financial Governance
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Cangemi Company, LLC