Question

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 state- ments from a recentannual 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

Answer 1

Date	Name of account	Debit	Credit
a.	Property, plant and equipment	54
	Depreciation and amortization	5
	Interest expense		13
	Retained earnings		46
b.	Property, plant and equipment	107
	Other long-term liabilities	98
	Restructuring charges		205
c.	Depreciation and amortization	5
	Property, plant and equipment		5
d.	Other noncurrent assets	475
	Depreciation and amortization	188
	Goods and services purchased		370
	Retained earnings		293
e.	Investments	50
	Equity in net loss of affiliate		50
	Total	982	982

Worksheet for Restating Swisscom’s Financial Statements from IFRSs to U.S. GAAP

Particulars	1	2	3		4
		Reconciling Adjustments
	IFRSs	Debit	Credit	Note	U.S. GAAP
Consolidated Statement of Operations
Net revenues	9,842				9,842
Capitalized cost and changes in inventories	277				277
Total	10,119				10,119
Goods and services purchased	1,666		370	d	1,296
Personnel expenses	2,584				2,584
Other operating expenses	2,090				2,090
Depreciation and amortization	1,739	5		a	1,937
		5		c
		188		d
Restructuring charges	1,726		205	b	1,521
Total operating expenses	9,805				9,428
Operating income	314				691
Interest expense	-428		13	a	-415
Financial income	25				25
Income (loss) before income taxes and equity in net loss of affiliated companies	-89				301
Income tax expense	1				1
Income (loss) before equity in net loss of affiliated companies	-90				300
Equity in net loss of affiliated companies	-325		50	e	-275
Net income (loss)	-415				25
Consolidated Ret Earnings Statement
Retained earnings, 1/1/97	-151		46	a	188
			293	d
Net loss	-415				25
Profit distribution declared	-1,282				-1,282
Conversion of loan payable to equity	3,200				3,200
Retained earnings, 12/31/97	1,352				2,131

Particulars	1	2	3		4
		Reconciling Adjustments
	IFRSs	Debit	Credit	Note	U.S. GAAP
Consolidated Balance Sheet
Assets
Current assets
Cash and cash equivalents	256				256
Securities available for sale	51				51
Trade accounts receivable	2,052				2,052
Inventories	169				169
Other current assets	34				34
Total current assets	2,562				2,562
Non-current assets
Property, plant and equipment	11,453	54		a	11,609
		107		b
			5	c
Investments	1,238	50		e	1,288
Other non-current assets	220	475		d	695
Total non-current assets	12,911				13,592
Total assets	15,473				16,154
Liabilities and shareholders' equity
Current liabilities
Short-term debt	1,178				1,178
Trade accounts payable	889				889
Accrued pension cost	789				789
Other current liabilities	2,213				2,213
Total current liabilities	5,069				5,069
Long-term liabilities
Long-term debt	6,200				6,200
Finance lease obligation	439				439
Accrued pension cost	1,488				1,488
Accrued liabilities	709				709
Other long-term liabilities	338	98		b	240
Total long-term liabilities	9,174				9,076
Total liabilities	14,243				14,145
Shareholders' equity
Retained earnings	1,352			R/E	2,131
Unrealized market value adjustment on securities available for sale	39				39
Cumulative translation adjustment	-161				-161
Total shareholders' equity	1,230				2,009
Total liabilities and shareholders' equity	15,473	794	794		16,154

Ratios

	IFRSs	U.S. GAAP	Difference*
1. Net income/Net revenues	-4.22%	0.25%	-106.02%
2. Operating income/Net revenues	3.19%	7.02%	120.06%
3. Operating income/Total assets	2.03%	4.28%	110.79%
4. Net income/Total shareholders’ equity	-33.74%	1.24%	-103.69%
5. Operating income/Total shareholders’ equity	25.53%	34.40%	34.73%
6. Current assets/Current liabilities	0.51	0.51	0.00%
7. Total liabilities/Total shareholders’ equity	11.58	7.04	-39.20%

* Difference = (U.S. GAAP – IFRSs) / IFRSs

Operating income/Net revenues is the ratio most affected by the accounting standards used. The current ratio is unaffected by the accounting standards used.