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management partnership identified in the Executive Summary dated
October 9, 1989:
The Partnership also allows Colgate to
effectively retire its debt, while leaving
the debt outstanding for accounting purposes,
* * * As Colgate bears a relatively greater
share of the Treasury risk * * * with respect
to its debt, it has economically retired an
increasing percentage of such debt * * *
Petitioner's expert, Kenneth Singleton of Stanford University,
makes the same point:
[E]xposure to Colgate debt through
Southampton would have fully hedged an equal
amount of liabilities on Colgate's balance
sheet * * * From this particular perspective,
Colgate's investment in Southampton had an
impact similar to the consolidation of the
bonds owned by ACM onto Colgate's balance
sheet * * *
If the LIBOR Notes were not necessary as a hedge for Colgate in
December 1991, they had never been necessary.
It is true that the hedging effect of Colgate's investment
in its own debt did not appear on Colgate's consolidated
financial statements until ACM was actually consolidated for
financial reporting purposes. All the same, the Colgate bonds
were stated on the balance sheet at their historic cost and were
not revalued to reflect changes in the market cost of capital.
Yet, Colgate's investment in the partnership would be marked to
market, in accordance with the convention for reporting swaps or
other hedging activities. This asymmetrical accounting treatment
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