Global Finance 413monetary liabilities exceeding monetary assets (net liability exposure), are
summarized in Exhibit 12.35.
Tiger treated the purchasing power gain as an adjustment to depreciation
and interest expense based upon the following reasoning: “Because Tiger fi-
nances substantially all of its fixed assets with long-term debt, it effectively
hedges against the impact of inf lation on depreciation and interest expense.”
Tiger ’s liability exposure serves as a hedge because it produces a gain under in-
f lationary conditions, to offset increases in the cost of asset replacement and
interest expense, which go hand in hand with inf lation.^58
The price-level adjusted reporting illustrated above proved to be a very
controversial requirement. It proved difficult to document that the price-level
adjusted data were used by either creditors or investors, or that they aided
analysis and decision making in any significant way. In 1986, SFAS No. 89: Fi-
nancial Repor ting and Changing Prices was issued, which eliminated manda-
tory disclosure of price-level adjusted data.^59 The Statement did encourage
continued disclosure on a voluntary basis. U.S. firms have, however, not re-
sponded to this encouragement and the price-level adjusted disclosures have
not been continued.
U.S. GOVERNMENT RESTRICTIONS ON BUSINESS
PRACTICES ASSOCIATED WITH FOREIGN
SUBSIDIARIES AND GOVERNMENT^60
The last issue raised in the opening Fashionhouse scenario dealt with U.S. gov-
ernmental restrictions on business practices associated with overseas opera-
tions. Recall that in reviewing the possible relocation of manufacturing to a
high inf lation/low labor-cost country, Fashionhouse management became
aware of potential ethical and legal issues.
Over the years the U.S. government became concerned with the practices
sometimes followed by U.S. firms doing business overseas. Of special concern
were payments to foreign governmental officials made to obtain business. From
hearings over a number of years, which focused on such incidents, a recurring
theme emerged: Even though such payments did take place, key members of
management were often unaware that the payments were being made.
EXHIBIT 12.35 Purchasing power gains and
losses and net monetary position.
Net Monetary Position
Price Movement Asset Liability
Inf lation Loss Gain
Def lation Gain Loss