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
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Which of these ratios is most (least) affected by the accounting standards used?
SOLUTION
1. Reconciling Adjustments
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
2.
Worksheet for Restating Swisscom’s Financial Statements from IFRSs to U.S. GAAP
(1)
(2)
(3)
(4)
Reconciling Adjustments
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
(1)
(2)
(3)
(4)
Reconciling Adjustments
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
It is difficult to interpret the size of the difference in ratios involving Net income, because net income is negative under IFRSs but positive under U.S. GAAP.
Operating income/Net revenues is the ratio most affected by the accounting standards used, followed by Operating income/Total assets. This is attributable to the fact that Operating income is more than twice as large under U.S. GAAP as under IFRSs.
The current ratio is unaffected by the accounting standards used.