Question: Swisscom AG, the principal provider of
Swisscom AG, the principal provider of telecommunications in Switzerland, prepares 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? 
Current Year Ended (CHF in millions) December 31 Net income (loss) according to IFRS…………………………………………………. (415) U.S. GAAP adjustments a) Capitalization of interest cost…………….………………………………………………….8 b) Restructuring charges……………………………………………………………………….205 c) Depreciation expense…………………………………………………………………………. (5) d) Capitalization of software…………………………………………………………………….182 e) Restructuring charges by afï¬liates………………………………………………………..50 Net income according to U.S. GAAP………………………………………………………….25 Reconciliation of shareholders’ equity from IFRS to U.S. GAAP The following is a reconciliation of the signiï¬cant adjustments 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. Current Year Ended (CHF in millions) December 31 Shareholders’ equity according to IFRS………………….………………………1,230 U.S. GAAP adjustments a) Capitalization of interest cost…………………………………………………………54 b) Restructuring charges………………………………………………………………….205 c) Depreciation expense……………………………………………………………………. (5) d) Capitalization of software……………………………………………………………. 475 e) Restructuring charges by afï¬liates………………………………………………….50 Shareholders’ equity according to U.S. GAAP…………………………………2,009 
Current Year (CHF in millions) Restructuring charges in accordance with IFRS: Personnel restructuring charges……………………………………………………………1,326 Write-down of long-lived assets………………………………………………………………. 316 Miscellaneous restructuring charges…………………………………………………………..84 Total in accordance with IFRS………………………………………………………………...1,726 Adjustments to restructuring charges to accord with U.S. GAAP…………….…. (205) Restructuring charges in accordance with U.S. GAAP………………………………. 1,521 Current Year Ended Reconciliation of restructuring charges December 31 Restructuring charges according to U.S. GAAP are comprised of the following: Personnel restructuring charges…………………………………………………………..1,228 Write-down of long-lived assets…………………………………………………..………….209 Miscellaneous restructuring charges ………………………………………………………..84 Restructuring charges in accordance with U.S. GAAP……………………...........1,521 Note: Assume the counterpart to the personnel restructuring charge affects “other long-term liabilities.†c) Depreciation Expense Due to the difference in carrying value of long-lived assets after write-downs described in (b), there is a difference in 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 depreciation 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 disclosed in the reconciliation of net income (loss) 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) Restructuring charges of afï¬liates During the current year, Swisscom’s share of personnel and other restructuring charges recorded by afï¬liates 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 U.S. GAAP.
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Worksheet for the Restatement of Swisscom's Financial Statements from IFRS to U.S. GAAP (2) (3) Reconciling Adjustments (1) IFRS (4) Debit Credit U.S. GAAP Consolidated Statement of Operations Net revenues 9,842 Capitalized cost and changes in inventories 277 Total 10,119 Goods and services purchased Personnel expenses Other operating expenses Depreciation and amortization 1,666 2,584 2,090 1,739 Restructuring charges. Total operating expenses Operating income . 1,726 9,805 314 Interest expense. (428) Financial income. 25 Income (loss) before income taxes and equity in net loss of affiliated companies Income tax expense (89) Income (loss) before equity in net loss of affiliated companies. (90) equity in net loss of affiliated 325) (415) соmpanies. Net income (loss). Consolidated Retained Earnings Statement Retained earnings, 1/1 (151) Net loss. (415) Profit distribution dedared (1,282) Conversion of loan payable to equity 3,200 Retained earnings, 12/31 1,352 Consolidated Balance Sheet Assets Current assets Cash and cash equivalents Securities available for sale 256 51 Trade accounts receivable. 2,052 Inventories 169 Other current assets 34 Total current assets 2,562 (2) Reconciling Adjustments (3) (4) (1) U.S. IFRS Debit Credit GAAP Non-current assets Property, plant and equipment 11,453 Investments 1,238 Other non-current assets. 220 Total non-current assets 12,911 Total assets 15,473 Liabilities and shareholders' equity Current liabilities Short-term debt Trade accounts payable 1,178 889 Accrued pension cost.. 789 Other current liabilities 2,213 Total current liabilities 5,069 Long-term liabilities Long-term debt .. Finance lease obligation 6,200 439 Accrued pension cost. Accrued liabilities 1,488 709 Other long-term liabilities. Total long-term liabilities 338 9,174 Total liabilities 14,243 Shareholders' equity Retained earnings .. 1,352 Unrealized market value adjustment on securities available for sale Cumulative translation adjustment Total shareholders' equity . 39 (161) 1,230 Total liabilities and shareholders equity 15,473 a) Capitalization of Interest cost Swisscom expenses all interest costs as Incurred. U.S. GAAP requires Interest costs Incurred 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, Swisscom recognized under IFRS restructuring charges totaling CHF 1,726 million. The following schedule illustrates adjustments necessary to reconcile these charges to amounts determined under U.S. GAAP. .
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