The following excerpts were taken from the notes to consolidated financial statements in the 2006 annual report of the Novartis Group, the Swiss pharmaceutical company:
Note33 Significant Differences between IFRS and United States Generally Accepted Accounting Principles (U.S. GAAP)
The Group's consolidated financial statements have been prepared in accordance with IFRS, which as applied by the Group, differs in certain significant respects from U.S. GAAP.
33.9) Share-Based Compensation
There are differences in the transitional rules on adopting the expensing of share-based compensation between IFRS and U.S. GAAP, which results in a difference in the income statement charge between IFRS and U.S. GAAP. As a result of this difference, an additional expense was recognized under U.S. GAAP in 2006 of USD 5 million (2005: USD 44 million).
In addition, under IFRS, the Group accounts for all share-based compensation equity-settled transactions in equity. However, under U.S. GAAP an arrangement which is a fixed monetary amount that is settleable with a variable number of the issuers equity shares is classified as a liability. The USD 186 million booked in the IFRS equity at December 31. 2006 (2005: USD 96 million). was reversed for U.S. GAAP purposes.
Required:
a. Determine whether the adjustments described in Note 33.9, Share-Based Compensation, cause net income for the year 2006 and stockholders' equity at December 31, 2006, to be higher under IFRS or U.S. GAAP.
b. Determine the directional impact (increase, Decrease, no effect) the difference in accounting for share-based compensation in 2006 under IFRS and U.S. GAAP would have on the following ratios:
(1) Current ratio [Current assets/Current liabilities]
(2) Debt-to-equity ratio [Total liabilities/Total stockholders' equity]
(3) Total asset turnover [Net sales/Average total assets]
(4) Profit margin [Net income/Net sales]
(5) Return on equity [Net income/Average total stockholders' equity]