Transcript Credit_Crisis_and_the_Future_ of_ Accounting

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 threequarters of U.S. GDP.
© R. McGarvey, 2005

IASB: “an asset is a resource that is controlled by the

Role of Assets #1, Source of Earnings
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.”
◦ 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
© 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?