Case 10-1 Swisscom AG Swisscom AG, the principal provider of telecommunications in Switzerland, pre- pares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Until 2007, Swisscom also reconciled its net income and stockholders' equity to U.S. GAAP. Swisscom's consolidated financial statements from a recent annual report are presented in their original format in Column 1 of the following worksheet. Note 27, Differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles, which includes Swisscom's U.S. GAAP reconciliation, also is provided.

Required

1. Use the information in Note 27 to restate Swisscom's consolidated financial statements in accordance with U.S. GAAP. Begin by constructing debit/credit entries for each reconciliation item, and then post these entries to columns 2 and 3 in the worksheets provided.

2. Calculate each of the following ratios under both IFRS and U.S. GAAP and determine the percentage differences between them using IFRS ratios as the base: Net income/Net revenues

Operating income/Net revenues

Operating income/Total assets

Net income/Total shareholders' equity

Operating income/Total shareholders' equity

Current assets/Current liabilities

Total liabilities/Total shareholders' equity

Which of these ratios is most (least) affected by the accounting standards used?

Worksheet for the Restatement of Swisscom's Financial Statements from IFRS to U.S.GAAP Consolidated Statement of Operations Net revenues . . . . . . . ........ .... Capitalized cost and changes in Inventories . . ................. Total Cash Secu (1) IFRS Trade .......... ............. Other ....... .. . Operating income .. .......... . ... Interest expense .......... ....... Financial income ................. . Income (loss) before income taxes and equity in net loss of affiliated companies .......... 9,842 Total -111 ..............10,119 1,666 2,584 ....................... ... Goods and services purchased . ...... Per;onnelexpenses . .............. Other operating expenses ........... Depreciation and amortizat on ....... Restructunng charges . . .......... .. Total operating expenses . . .... (2) 2,090 1,739 1,726 9,805 314 (428) _1.?. (89) (90) (325) (415) Income tax expense ............... Income (loss) before equity in net loss of affiHated companies . .. ... Equity in netloss of affiliated companies ............ ........ Net income (loss) ........ Consolidated Retained Earnings Statement Retained earnings, 111... .... ..... Net loss .......... ...... ........ Profit d1stribution declared . .. ...... Conversion of loan payable to equity .. Retained earnings,12131' .......... Consolidated Balance Sheet Assets Current a.ssets {151) (415) (1,282) 3.200 1,352 256 51 2,052 169 34 2,562 (3) Reconciling Adjustments Debit Credit (4) U.S.GAAP (2) (1) IFRS Non-current assets Property, plant and equipment .......... Investments .. ...... ........ ... . ... .. Other non-current assets . ............... Total non-current assets .............. Total as.sets ......................... Liabilities and shareholders'equity Current liabilities Short-term debt ..................... Trade accounts payable ................ Accrued pension cost.................. Other currentliabilities ................. Total current liabilities . ........ ...... Long-term liabilities Long-term debt ..... ........... ....... lease obligation . ........ . Finance ...... pension cost. Accrued .................. ... ........... Accrued liabtlitJes ....... Other long-term liabilities................ ...... Total long-term liabilities ....... Totalliabilities ............. ......... Shareholders'equity Retarned earnings .................... Unrealized market value adjustment on securities available for sale ......... Cumulative translation adjustment . ....... Total shareholders'equity ............ Total liabilities and shareholders' equity .................... ...... . (3) Reconciling Adjustments Debit Credit (4) U.S. GAAP 11,453 1,238 220 12,911 15,473 1,178 889 789 2,213 5,069 6,200 439 1,488 709 338 9,174 14,243 1,352 15,473 27. Differences between International Financial Reporting Standards and U.S. Generally Acc.epted Ac.counting Principles The consolidated financial statements of Swisscom have been prepared in accordance with International Financial Reporting Standards (IFRS}, which differ incertain respects from generally accepted accounting principles in the United States (U.S.GAAP).Application of U.S. GAAP would have affected the balance sheet and net income (loss) to the extent described below.A description of the material differences between IFRS and U.S.GAAP as they relate to Swisscom are discussed in further detail below. Reconciliation of netincome (toss) from IFRS to U.S.GAAP The following schedule illustrates the significant adjustments to reconcile net income (loss) inaccordance with U.S.GAAP to the amounts determined under IFRS, for the current year ended December 31. Current Year Ended December 31 (CHFin millions) (415) Netincome (loss) according toIFRS U.S.GAAP adjustments 8 a) Capitalizat on of interest cost .. .. ....... ...... ................ b) Restructuring charges ........... ...... ...................... c) Depreciation expense ................. . ...................... d) Capitalization of software ........... ......... ........ .... ... e) Restructuring charges by affiliates ... ............... ... ........ Netincome according to U.S.GAAP ................ .......... . . equity from IFRS to U.S.GAAP 205 (5) 182 50 25 Reconciliation of shareholders' The following is a reconci at,on of the 519nificant ad1ustments necessary to reconcile shareholders' equity in accordance with U.S.GAAP to the amounts determined under IFRS as at December 31 of the current year. (CHF in millions) Shareholders'equity according toIFRS U.S.GAAP adjustments a) Capitalization of interest cost ......... ........ ............... .. b) Restructuring charges ........ .. ................. . .............. c) Depreciation expense ........... .. ...... . . .. .... ...... . d) Capitalzat on of software ........... ............. .............. e) Restructuring charges by affifiates .................. .............. Current Year Ended December 31 1,230 54 205 (5) 475 50 2,009 Shareholders'equity according to U.S.GAAP ..................... a) Capitalization of interest cost Swisscom expenses all interest costs asincurred.U.S.GAAf> requires interest costsincurred during the construction of property, plant and equipment to be capitalized.Under U.S.GAAP Swisscom would have capitalized CHF 13 million and amortized CHF 5 million for the current year . b) Restructuring charges During the current year,SW1SSCom recognized under IFRS restructuringcharges totaling CHF 1,726 million.The following schedule illustrates adjustments necessary to reconcile these charges to amounts determined under U.S.GAAP. Current Year (CHFin millions) Restructuring chargesinaccorda.nce withIFRS: Personnel restructunng charges ........... .......... ............. Write-downoflong-lived as.sets. ..... ........... . 1,326 316 .... . ............ . 1,726 (205) 1,521 Miscellaneous restructunng charges ...... ............ ... ..... .... Totalin accordance withIFRS ...... ..... ..... ...... . ........... . Adjustments to restructunng charges to accord with U.S.GAAP ............ Restructuring charges in accordance with U.S.GAAf>...... .... ..... .... 84 Recondllation of restructuring charges Current Year (CHF in millions) Restructuring charges according to U.S.GAAP are comprised of the following: Personnel restructuring charges .. . ..... ... ............... ... . . . ... . .. 1,228 Write-down oflong-lived assets ... ....................... ... . ........ 209 Miscellaneous restructunng charges ..... . .. .............. .......... 1,521 .. Restructuring charges in accordance with U.S.GAAP . .. .......... .. . ..... Note: Assume the counterpart 10 the pei'sonnel restruaunng charge affeas other long-term lia lles. c) Depreciation Expense Due to the difference in carrying value of long-lived assets after write-downs described in (b), there is a differencein the amount of depreciation expense taken under IFRS and U.S.GAAP.An adjustment is made for the current year to record an additional CHF 5 million of depredation under U.S.GAAP. d) Capitalization of software Swisscom has expensed software costs as incurred.For U.S.GAAP purposes external consultant costs incurred in the development of software for internal use have been capitalized.These costs are being amortized over a three year period.The capitalization of software costs accords with common practice in the U.S.telecommunications industry. Swisscom has capitalized,as d1sdosed in the reconciliation of net income Ooss) and shareholders' equity to U.S. GAAP,CHF 220 million and amortized CHF 37 million in the previous year and capitalized CHF 370 million and amortized CHF 188 million in the current year. e) Rest.ructuringcharges of affiliates During the current year, Swisscom's share of personnel and other restructuring charges recorded by affiliates amounted to CHF 50 million.These restructunng charges do not meet all the recognition criteria containedin EITF 94-3 and therefore cannot be expensedin the current year,under U.S.GAAP