A Presentation to Entrepreneurial CA Luncheon November 25th, 2008

 Financial Market Seizure. Securitization market : This market is CLOSED 85% of mortgages were funded through the securitization market in the better part of this decade. The seizure of this market has also severely impacted liquidity in credit card markets, student loans, corporate finance amongst others Next problem area is basic bank ‘on balance sheet’ lending. First time EVER you’re going to see an overall contraction in the mortgage lending in the United States  The Ring of Fire : Self Reinforcing (downward) Spiral: rating agencies, and their downgrades of various securities, various corporate debts that (then) require additional capital for the banks to post, which triggers more downgrades etc.

 Next to Go: A major corporate failure will (probably) trigger a seizure in the Credit Default Swap market Many state and local governments in the US participated in the mortgage market, and now their feeling the pinch = about 12% of US GDP. Credit cards, two trillion dollars in liquidity is being taken away from consumers – this is literally going to be ripped out of their wallets. (credit card lines will be reduced by this amount)

New Engines of Growth in the global economy

Source: Brookings Institute

 Declining Industry ◦ Between 1995 and 2005 the world’s 20 largest economies lost approximately 25 million industrial jobs.  Continued Growth ◦ Nevertheless, despite the shrinking of their industrial work forces, the output in these countries as a measure of GDP increased by over 50%.  Intangibles Dominate ◦ Today, in the United States and other Western economies in particular, market services have displaced industrial production as the primary engine of growth; studies suggest that ‘intangible’ assets are now contributing over three- quarters of U.S. GDP.

© R. McGarvey, 2005

 IASB: “ an asset is a resource that is controlled by the enterprise as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected.”  Role of Assets #1, Source of Earnings ◦ An asset Traditional or Non-traditional must be a causal agent for earnings or their equivalent.  Role of Assets #2, Repository of Accumulated Value ◦ Asset quality is a critical factor in its ability to store and maintain value (degree of asset permeability)

© R. McGarvey, 2007

© R. McGarvey, 2005

 Stage 1: New Assets Start Generating New Wealth  Spice Merchants in Venice, New Ford Assembly Lines  Stage 2: Management Rush to Earnings  The engines of growth are embraced EAGERLY  Stage 3: Over Stretch  Over commitment by business – unidentified risks  Monetary Over Stretch – Expanding money/credit supply  Fiscal Over Stretch – consumers/business/governments  Stage 4: Bubbles Burst: Stock Market Correct  The Sky is Falling etc.  Stage 5: Recession  Reform of institutions and behavior  Focus on ‘Preservation’ of capital  Stage 6: Rebirth  New legal, securities regulations, GAAP, etc – Have our Cake and Eat it Too.

Prepare for less tax oriented more asset management practices

 Prediction: within 20 years INCOME TAX will be gone, replaced by a combination of:  Consumption taxes (GST, VAT etc.)  Government/industry, royalty –like revenue streams.  Role of Accountants #1, Identifying, Evaluating and Measuring Corporate Value  A solid traditional accounting role returns.  Strengthening Balance Sheets (i.e. Management Statements ) rather than minimizing them for Tax Purposes.  Role of Accountants #2, Bridge to Finance  Banks et al are going to need support if they are to adequately capitalize the new economy, accountants have a VITAL role to play

Customer Equity: A Corporate Asset?