354 Planning and Forecasting
the countries under consideration business practices are occasionally employed
that could be a source of concern to Fashionhouse management. In some cases,
the practices raise issues that extend beyond simply ethical considerations.
Fashionhouse could become involved in activities that could place it in viola-
tion, not of local laws, but of U.S. laws. Fashionhouse management is still at-
tempting to determine how to evaluate and deal with some of the identified
managerial and financial issues associated with this contemplated move.
Each of the new stages in the evolution of the Fashionhouse strategy cre-
ates new challenges that have important implications for both management and
financial reporting. The evolution from a strictly domestic operation to one in-
volving the purchase of goods abroad thrusts Fashionhouse into the global
marketplace, with its attendant risks and rewards. It is common for U.S. firms
with foreign activities to enumerate some of these risks. These disclosures are
normally made, at least in part, to comply with disclosure requirements of the
Securities and Exchange Commission (SEC). As an example, consider the dis-
closures made by Western Digital Corporation of risk factors associated with
its foreign manufacturing operations:
- Obtaining requisite U.S. and foreign governmental permits and approvals.
- Currency exchange-rate f luctuations or restrictions.
- Political instability and civil unrest.
- Transportation delays or higher freight fees.
- Labor problems.
- Trade restrictions or higher tariffs.
- Exchange, currency, and tax controls and reallocations.
- Loss or nonrenewal of favorable tax treatment under agreements or
treaties with foreign tax authorities.^1
While not listed above as a specific concern, there is the risk that a for-
eign government will expropriate the assets of a foreign operation. There were
major expropriations of U.S. assets, for instance, located in Cuba when Fidel
Castro came to power. There were also expropriations by Iran surrounding the
hostage taking at the U.S. embassy in Tehran. Moreover there has been turmoil
in Ecuador in recent years. Baltek, a New Jersey corporation with most of its
operations in Ecuador, disclosed that it had taken out expropriation insurance
to deal with this risk:
All of the Company’s balsa and shrimp are produced in Ecuador. The depen-
dence on foreign countries for raw materials represents some inherent risks.
However, the Company, or its predecessors, has operated without interruption
in Ecuador since 1940. Operating in Ecuador has enabled the Company to pro-
duce raw materials at a reasonable cost in an atmosphere that has been favor-
able to exporters such as the Company. To mitigate the risk of operating in
Ecuador, in 1999 the Company obtained a five-year expropriation insurance
policy. This policy provides the Company coverage for its assets in Ecuador