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IFRS – in the US Market

IFRS – in the US Market. Michael P. Cangemi CPA, CISA President, Cangemi Company, LLC Former CEO Etienne Aigner & FEI. Management, IT, Financial Governance 1 Cangemi Company, LLC.

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IFRS – in the US Market

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  1. IFRS – in the US Market Michael P. Cangemi CPA, CISA President, Cangemi Company, LLC Former CEO Etienne Aigner & FEI Management, IT, Financial Governance 1 Cangemi Company, LLC

  2. 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 Management, IT, Financial Governance 2 Cangemi Company, LLC

  3. 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

  4. 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 4 Cangemi Company, LLC

  5. World Market Capitalization

  6. 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 6 Cangemi Company, LLC

  7. 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

  8. 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

  9. 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 D&T survey) • IFRS & US GAAP continue to converge

  10. 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 !!!!!!

  11. 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

  12. 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

  13. 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.

  14. 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.

  15. 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 rulings • Has a passion for principles • Just says no to rulings – says make up your mind and disclose your issues & rational

  16. 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

  17. 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

  18. 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

  19. 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.

  20. 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

  21. 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 22 Cangemi Company, LLC

  22. Discovery of America – New Land Schemes Management, IT, Financial Governance 23 Cangemi Company, LLC

  23. 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! Management, IT, Financial Governance 24 Cangemi Company, LLC

  24. Expansion of Governance & Regulation Management, IT, Financial Governance 25 Cangemi Company, LLC

  25. 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!!!

  26. Remember lots of Bad Guys Management, IT, Financial Governance 27 Cangemi Company, LLC

  27. 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.

  28. 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. 

  29. 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

  30. Questions? Comments? Management, IT, Financial Governance 32 Cangemi Company, LLC

  31. 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 Management, IT, Financial Governance 33 Cangemi Company, LLC

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