Case 10-1

Swisscom AG, the principal provider of telecommunications in Switzerland, prepares consolidated financial statements in accordance with IFRS. Until 2007, Swisscom also reconciled its net income and stockholders equity to US GAAP. Swisscom 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 IFRS and GAAP, which includes Swisscoms US GAAP reconciliation, also is provided.

Required

Use the information in Note 27 to restate Swisscoms consolidated financial statements in accordance with US 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.

Calculate each of the following ratios under both IFRS and GAAP and determine the percentage differences between them, using IFRS ratios as the base:

Net income/net revenue

Operating income/net revenues

Operating income/total assets

Net income/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 US GAAP
		Reconciling	Adjustment
	IFRS	DR	CR	US GAAP
Consolidated Statement of Operations
Net revenue	9,842
Capitalized cost and changes in inventory	277
Total	10,119
Goods and services purchased	1,666
Personnel expenses	2,584
Other operating expenses	2,090
Depreciation and amortization	1,739
Restructuring charges	1,726
Total operating expenses	9,805
Operating income	314
Interest expense	(428)
Financial income	25
Income(loss) before income taxes and equity in net loss of affiliated companies	(89)
Income tax expense	1
Income(loss) before equity in net loss of affiliated companies	(90)
Equity in net loss of affiliated companies	(325)
Net income(loss)	(415)
Consolidated Retained Earnings Statement
Retained earnings, 1/1	(151)
Net loss	(415)
Profit distribution declared	(1,282)
Conversion of loan payable to equity	3,200
Retained earnings, 12/31	1,352
Assets
Current assets
Cash and equivalents	256
Securities available for sale	51
Trade accounts receivable	2,052
Inventories	169
Other current assets	34
Total current assets	2,562
Noncurrent assets
Property, plant and equipment	11,453
Investments	1,238
Other noncurrent assets	220
Total noncurrent assets	12,911
Total assets	15,473
Current liabilities
Short-term debt	1,178
Trade accounts payable	889
Accrued pension cost	789
Other current liabilities	2,213
Total current liabilities	5,069
Long-term liabilities
Long-term debt	6,200
Finance lease obligation	439
Accrued pension cost	1,488
Accrued liabilities	709
Other long-term liabilities	338
Total long-term liabilities	9,174
Total liabilities	14,243
Shareholders' equity
Retained earnings	1,352
Unrealized market value adjustment on securities available for sale	39
Cumulative translation adjustment	(161)
Total shareholders' equity	1,230
Total liabilities and shareholders' equity	15,473

27. Differences between IFRS and GAAP

The consolidated financial statements of Swisscom have been prepared in accordance with IFRS, which differ in certain respects from GAAP in the US. Application of US 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 GAAP as they relate to Swisscom are discussed in further detail below.

Reconciliation of net income (loss) from IFRS to GAAP

The following schedule illustrates the significant adjustments to reconcile net income (loss) in accordance with US GAAP to the amounts determined under IFRS, for the current year ended December 31.

(CHF in millions)
Net income (loss) according to IFRS		(415)
US GAAP adjustments:
Capitalization of interest cost		8
Restructuring charges		205
Depreciation expense		-5
Capitalization of software		182
Restructuring charges by affiliates		50
Net income according to GAAP		25

Reconciliation of shareholders equity from IFRS to GAAP

The following is a reconciliation of the significant adjustments necessary to reconcile shareholders equity in accordance with US GAAP to the amounts determined under IFRS as at December 31 of the current year.

(CHF in millions)
Shareholders' equity according to IFRS		1230
US GAAP adjustments:
Capitalization of interest cost		54
Restructuring charges		205
Depreciation expense		-5
Capitalization of software		475
Restructuring charges by affiliates		50
Shareholders' equity according to GAAP		2009

Capitalization of interest cost

Swisscom expenses all interest costs as incurred. US GAAP requires interest costs incurred during the construction of property, plant and equipment to be capitalized. Under US GAAP, Swisscom would have capitalized CHF 13 million and amortized CHF 5 million for the current year.

Restructuring charges

During the current year, Swisscom recognized under IFRS restructuring charges totaling CHF 1726 million. The following schedule illustrates adjustments necessary to reconcile these charges to amounts determined under US GAAP.

Restructuring charges in accordance with IFRS
Personnel restructuring charges		1326
Write-down of long-lived assets		316
Misc. restructuring charges		84
Total in accordance with IFRS		1726
Adjustments to restructuring charges to accord with GAAP		(205)
Restructuring charges in accordance with GAAP		1521

Reconciliation of restructuring charges
Restructuring charges according to US GAAP consist of the following:
Personnel restructuring charges		1228
Write-down of long-lived assets		209
Misc. restructuring charges		84
Restructuring charges in accordance with GAAP		1521

Depreciation expense

Due to the difference in carrying value of long-lived assets after write-downs describe in (b), there is a difference in the amount of depreciation expense taken under IFRS and GAAP. An adjustment is made for the current year to record an additional CHF 5 million of depreciation under US GAAP.

Capitalization of software

Swisscom has expensed software costs as incurred. For US GAAP purposes, external consultant costs incurred I the development of software for internal use has been capitalized. These costs are being amortized over a 3 year period. The capitalization of software costs accords with common practice in the US telecommunications industry.

Swisscom has capitalized, as disclosed in the reconciliation of net income (loss) and shareholders equity to US 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.

Restructuring charges of affiliates

During the current year, Swisscoms share of personnel and other restructuring charges recorded by affiliates amounted to CHF 50 million. These restructuring charges do not meet all the recognition criteria contained in EITF 94-3 and therefore cannot be expensed in the current year, under US GAAP.