ACTG 2010 Lecture 3: ACTG2010 - Chapter 12

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1 Dec 2017

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From an entities perspective it"s not possible to identify the most important stakeholder; it depends on the entity"s circumstances. For example, a company needing equity capital would consider prospective shareholders most important. A company with few external stakeholders might focus on tax minimization. From the stakeholder"s perspective they would consider themselves the most important as they rely of the financial statements to form their financial decision i. e. whether to invest or lend. Net income is a measure of the extent to which economic benefits exceed economic costs. Ifrs and aspe it measures how much better off an entity"s owners are. Economic benefits are defined as revenues and economic sacrifices as expenses. Measurement of revenues and expenses depend on the definitions provided by the accounting standards. Under ifrs (and to a lesser extent under aspe) net income reflects unrealized gains and losses as well as realized ones.

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Case 10-1

Swisscom AG, the principal provider of telecommunications inSwitzerland, prepares consolidated financial statements inaccordance with IFRS. Until 2007, Swisscom also reconciled its netincome and stockholdersâ equity to US GAAP. Swisscom consolidatedfinancial statements from a recent annual report are presented intheir original format in Column 1 of the following worksheet. Note27, Differences between IFRS and GAAP, which includes Swisscomâs USGAAP reconciliation, also is provided.

Required

Use the information in Note 27 to restate Swisscomâsconsolidated financial statements in accordance with US GAAP. Beginby constructing debit/credit entries for each reconciliation item,and then post these entries to columns 2 and 3 in the worksheetsprovided.

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

Net income/net revenue

Operating income/net revenues

Operating income/total assets

Net income/shareholdersâ equity

Operating income/total shareholdersâ equity

Current assets/current liabilities

Total liabilities/total shareholdersâ equity

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

Worksheet for theRestatement of Swisscom's Financial Statements from IFRS to USGAAP
		Reconciling	Adjustment
	IFRS	DR	CR	US GAAP
Consolidated Statement of Operations

Net revenue	9,842
Capitalized cost and changes ininventory	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 incometaxes and equity in net loss of affiliated companies	(89)
Income tax expense	1
Income(loss) before equity innet loss of affiliated companies	(90)
Equity in net loss of affiliatedcompanies	(325)
Net income(loss)	(415)

Consolidated Retained EarningsStatement
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 valueadjustment 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 beenprepared in accordance with IFRS, which differ in certain respectsfrom GAAP in the US. Application of US GAAP would have affected thebalance sheet and net income (loss) to the extent described below.A description of the material differences between IFRS and GAAP asthey relate to Swisscom are discussed in further detail below.

Reconciliation of net income (loss) from IFRS toGAAP

The following schedule illustrates the significant adjustmentsto reconcile net income (loss) in accordance with US GAAP to theamounts determined under IFRS, for the current year ended December31.

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

Reconciliation of shareholdersâ equity from IFRS toGAAP

The following is a reconciliation of the significant adjustmentsnecessary to reconcile shareholdersâ equity in accordance with USGAAP to the amounts determined under IFRS as at December 31 of thecurrent year.

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

Capitalization of interest cost

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

Restructuring charges

During the current year, Swisscom recognized under IFRSrestructuring charges totaling CHF 1726 million. The followingschedule illustrates adjustments necessary to reconcile thesecharges to amounts determined under US GAAP.

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

Reconciliation of restructuring charges
Restructuring chargesaccording to US GAAP consist of the following:
Personnel restructuringcharges		1228
Write-down of long-livedassets		209
Misc. restructuring charges		84
Restructuring charges inaccordance with GAAP		1521

Depreciation expense

Due to the difference in carrying value of long-lived assetsafter write-downs describe in (b), there is a difference in theamount of depreciation expense taken under IFRS and GAAP. Anadjustment is made for the current year to record an additional CHF5 million of depreciation under US GAAP.

Capitalization of software

Swisscom has expensed software costs as incurred. For US GAAPpurposes, external consultant costs incurred I the development ofsoftware for internal use has been capitalized. These costs arebeing amortized over a 3 year period. The capitalization ofsoftware costs accords with common practice in the UStelecommunications industry.

Swisscom has capitalized, as disclosed in the reconciliation ofnet income (loss) and shareholdersâ equity to US GAAP, CHF 220million and amortized CHF 37 million in the previous year andcapitalized CHF 370 million and amortized CHF 188 million in thecurrent year.

Restructuring charges of affiliates

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

limeelk579

Investment and financing decisions, which may beshort-term or long-term decisions are best describedas:

financial decision making.

economic decision making.

accounting decision making.

Mutual funds, pension funds, investment dealers andinsurance companies are best described as examples of:

corporate finance.

market intermediaries.

financial intermediaries.

Farmers and Merchants Bank lends money to Ruth topurchase a car from Steven Toyota. Ruth is going to insure the carwith Allstate Insurance. Which party is best described as thecreditor?

Ruth

Steven Toyota

Allstate Insurance

Farmers and Merchants Bank

Which of the following would not be described as adebenture?

An unsecured loan

A loan secured by collateral

A loan secured by the âfull faith and creditâ of theissuer

Morgan Stanley was the investment banking firm that tookFacebook from being a closely held company to issuing stock to thepublic for the first time. Which of the following terms mostclosely describes this?

money market security.

issuing commercial paper.

initial public offering (IPO).

debt security backed by the general credit of theissuer.

Which of the following transactions does not take placein the primary market? An investor:

buying a newly issued municipal bond.

buying shares of an initial publicoffering.

selling one hundred shares of stock through a stockbroker.

buying a U.S. Treasury bill through the governmentauction.

The majority of home purchases in the U.S. are securedwith a mortgage. A mortgage is:

an unsecured loan.

an equity investment in the property.

a debt obligation secured by a specificproperty.

Which form of business would most likely describe thefollowing, a college student other students, a retired woman whobabysits children, a teenager who mows lawns, and a partyclown?

Partnership

Corporation

Sole proprietorship

Limited liability company

Flow-through taxation is a characteristic for all butthe following forms of business?

Partnership

Corporation

Sole proprietorship

Limited liability company

Your sister wants to start a tee shirt business on e-Baywith you to help pay for college tuition. All of the following areadvantages to partnerships that you should both consider, except____________?

Easy to form

Access to capital

Business income is taxed once, at the individualpartnerâs level

Which of the following takes into account takes intoaccount the opportunity cost of funds?

Net profit

Economic profit

Accounting profit

When we talk about capital structure, this refersto:

the cash, inventory, and accountsreceivable.

mix of debt and equity to finance anenterprise.

the investment in plant, property andequipment.

The uncertainty associated with the use of debt tofinance a business enterprise is best described as:

financial risk.

business risk.

operating risk.

The mix of debt and equity that is used to finance abusiness enterprise is best described as theenterpriseâs:

assets.

working capital.

capital structure.

capital expenditures

Generally accepted accounting principles (GAAP) are bestdescribed as a(n):

organization that establishes the accounting principlesfor U.S. financial reporting.

accounting standards promulgated by the InternationalAccounting Standards Board (IASB.)

set of basic principles and conventions that are appliedin the preparation of financial statements.

organization that establishes the accounting principlesfor business entities in the European EconomicCommunity.

Which reporting convention requires recording revenueand expenses when the transaction occurs, regardless of when cashchanges hands?

Cost basis

Cash basis

Accrual basis

The summary of the companyâs performance over a periodof time, typically a fiscal quarter or fiscal year

Balance sheet

Statement of stockholderâs equity

Income statement

Statement of cash flows

_______ is the cash flow from the day-to-day operationsof the business; the result of subtracting the increase in newworking capital from traditional cash flow.

Cash flow from investing

Cash flow from financing

Simple cash flow

Cash flow from operations

The debt ratio is classified as which type ofratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

Inventory turnover, accountsreceivable turnover, fixed asset turnover, and total asset turnoverare all classified as which type of ratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

ABC Company attempts tomanage its earnings by extending the useful life of all of itsequipment. Which of the following will not be an outcome of thischoice by management?

Income will be higher than it would have been underprior accounting methods.

Equipment values will be higher than they would havebeen without the change.

Depreciation expense will be lower than it would havebeen under prior accounting methods.

Depreciation expense will be higher than it would havebeen under prior accounting methods.

It is important for a companyto know the level of sales at which it covers all its variable andfixed operating costs. This level of sales is best described asthe:

gross profit margin.

contribution margin.

operating break even.

operating profit margin.

The minimum return thatinvestors expect to earn on the investment in stock is bestdescribed as:

growth rate.

risk premium.

capital gains yield.

required rate of return

If a company returns more than the required rate ofreturn on a stock, what happens to the value of thatstock?

The stock price falls.

The stock price rises.

The stock price stays the same.

When market rates are greaterthan the dividend rate, preferred shares will tradeat:

par.

a discount.

a premium.

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ACTG 2010 Lecture 3: ACTG2010 - Chapter 12

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