Implementation of International Financial Reporting Standards (IFRS)

Regulations of the European Union (EU) require that publicly listed companies within the EU prepare their consolidated financial statements in accordance with “International Financial Reporting Standards” (IFRS) by 2005. Due to the European Economic Area (EEA) agreement, Norwegian listed companies will also be required to follow IFRS. Telenor’s first IFRS financial statements will be for the year ending 31 December 2005 and will include the comparable figures for 2004. Starting in the first quarter of 2005, Telenor will provide unaudited financial information in accordance with IFRS including comparable figures for 2004.

Telenor has made an evaluation of the differences between Telenor’s current accounting principles according to Norwegian Generally Accepted Accounting Principles (N GAAP) and IFRS principles based on management’s current understanding of these standards. There is inherent uncertainty around the interpretation and implementation of IFRS. Accordingly, new pronouncements and interpretations may be issued during 2005 which could affect the final IFRS figures for 2004 and the interim figures for 2005. Consequently, changes in the company’s understanding of IFRS may result in revisions or other differences than those identified below. The figures are not audited. Audited figures will be reported in the financial statements for the year ended 31 December 2005.

Transitional effects for Telenor
In general, IFRS 1 “First-Time Adoption of International Financial Reporting Standards” provides that accounting policies applied in the comparative period of 2004 must be consistent with IFRS standards effective at the reporting date for its first IFRS financial statements, which is 31 December 2005 for Telenor. However, there are certain voluntary and mandatory exemptions in IFRS 1 of which the most important to Telenor are:

(a) Business combinations: Business combinations prior to 1 January 2004 will not be restated in accordance with IFRS and the basis as determined for N GAAP will be carried forward. Telenor will follow IFRS for business combinations subsequent to 1 January 2004. On 12 February 2004, the remaining 46.5% shares of the associated company Sonofon were acquired increasing Telenor’s ownership interest to 100%. The purchase will be restated and the assets and liabilities assumed will be recognized at fair value as of 12 February 2004 (the date of consolidation) according to IFRS. For N GAAP, only 46.5% of the fair values were recognized at the date of consolidation and the carrying values for the original investment in Sonofon were carried forward. The purchase price allocation according to IFRS will increase net excess values and therefore increase the group’s equity at the time of consolidation compared with NGAAP. Due to a different depreciation and amortization profile of the identified assets under IFRS, the depreciation and amortization expense for 2004 will be reduced under IFRS compared to N GAAP. At year end 2004, an impairment was necessary for Sonofon and the resulting write-down of goodwill according to IFRS will be higher than that according to N GAAP.

(b) Employee benefits: Telenor has elected to recognize all cumulative actuarial gains and losses on pension obligations at the date of transition to IFRS. This will decrease Telenor’s equity as of 1 January 2004, and decrease pensions expenses for 2004 compared to N GAAP. Telenor plans to use the corridor approach for actuarial gains and losses subsequent to 1 January 2004. The cumulative actuarial losses as of 1 January 2004 for IFRS will be higher than those according to N GAAP. This is primarily due to the use of a lower discount rate and the calculation of social security tax according to IFRS.

(c) Share-based payments: The fair value of share-based compensation at the grant date is expensed over the vesting period according to IFRS. Telenor uses a Black & Scholes valuation model to calculate the fair value. According to the transitional rules only options granted subsequent to 7 November 2002 that had not vested as of 1 January 2005 will be included. In accordance with N GAAP, no expense was recognized for stock options that did not have any intrinsic value at the grant date.

(d) Cumulative translation differences that existed at the date of transition to IFRS for all foreign operations and the corresponding translation differences on financial instruments used to hedge such investments are deemed to be zero at the date of transition to IFRS, and are kept permanently in equity. As a consequence, the gain or loss on a subsequent disposal of an entity reported in currency other than Norwegian Krone shall exclude translation differences that arose before the date of transition to IFRS. This will have no effect on the total equity as of 1 January 2004, but has a positive effect on the gains on sale in 2004 according to IFRS compared to N GAAP. Telenor’s cumulative translation differences as of 1 January 2004 were NOK 2 billion in accordance with N GAAP.

(e) IAS 39 “Financial Instruments: Recognition and Measurement” is not implemented until 1 January 2005. The main effects for Telenor are expected to be:

• Accounting for derivatives qualifying as hedges under N GAAP will continue up to and including 31 December 2004.
• As of 1 January 2005, Telenor will record all derivative instruments at fair value. This will decrease equity as of 1 January 2005 by approximately NOK 270 million.
  
• Interest rate derivatives used to manage the overall risk of Telenor’s debt portfolio will not qualify for hedge accounting according to IFRS, effective as of 1 January 2005. This is a change compared to N GAAP. These derivatives will be treated as stand alone financial instruments and gains or losses from fair value adjustments will be recorded to the statement of profit and loss subsequent to 1 January 2005.
  
• Bonds and derivatives designated as hedge objects and hedge instruments, respectively, for fair value hedges will be presented gross in the balance sheet. For N GAAP, these hedge relationships were presented net.
  
• Telenor will record shares held-for-sale at estimated fair value. Changes in the fair values of investments in shares will be recorded in a separate component of equity until impaired or sold. This will increase equity as of 1 January 2005 by approximately NOK 460 million.

Reconciliation of net income and equity for the Telenor Group from N GAAP to IFRS
The tables below show the estimated effects on net income and equity of implementing IFRS as from 1 January 2004. Comments to the various effects on net income and equity are provided below the tables.

Consolidated Statement of Profit and Loss
			IFRS
In NOK millions except per share amounts	Note	N GAAP 2004	reclas-sification	adjustments	2004
Revenues	1a), 1b)	60,752	-	(51)	60,701
Gains on disposal of fixed assets and operations	2)	550	(550)	-	-
Total revenues		61,302	(550)	(51)	60,701
Operating expenses
Costs of materials and traffic charges	1b)	16,070	-	(20)	16,050
Own work capitalized		(557)	-	-	(557)
Salaries and personnel costs	1b), 3), 4)	10,021	-	(51)	9,970
Other operating expenses	1b), 2), 5)	14,873	(898)	(104)	13,871
Losses on disposal of fixed assets and operations	2)	74	(74)	-	-
Other income and expenses	2), 10)	-	422	(12)	410
Amortization of goodwill	7)	939	-	(939)	-
Depreciation and amortization - other	5), 6)	10,684	-	(47)	10,637
Write-downs	8)	2,596	-	935	3,531
Total operating expenses		54,700	(550)	(238)	53,912
Operating profit (loss)		6,602	-	187	6,789
Associated companies	9)	718	-	268	986
Financial income and expenses
Financial income		496	-	-	496
Financial expenses	5)	(1,534)	-	(27)	(1,561)
Net currency loss		(87)	-	-	(87)
Net gain (loss) and write-downs of financial items	10)	2,651	-	22	2,673
Net financial items		1,526	-	(5)	1,521
Profit (loss) before taxes and minority interests		8,846	-	450	9,296
Taxes	11)	(2,244)	-	(55)	(2,299)
Profit (loss) before minority interests		6,602	-	395	6,997
Minority interests		(1,244)	-	(76)	(1,320)
Net income		5,358	-	319	5,677
Net income (loss) per share in NOK (basic), excluding treasury shares		3,07	-	0.18	3.25
Net income (loss) per share in NOK (diluted), excluding treasury shares		3,06	-	0.18	3.24

In NOK millions	Note	Net income 2004	Equity 01.01.04	Equity 31.12.04
Net income and shareholders’ equity – N GAAP		5,358	37,237	37,594
Amortization of goodwill, negative goodwill	7)	939	343	1,282
Depreciation and amortization – other	6)	63	-	63
Write-down of goodwill	8)	(935)	-	(935)
Business combinations and translation differences	8)	-	-	550
Pensions	3)	95	(1,825)	(1,730)
Asset retirement obligations	5)	(46)	(296)	(342)
Sharebased compensation	4)	(19)	-	-
Sale of software	1a)	51	(267)	(216)
Associated companies	9)	268	(139)	129
Adjusted gains	10)	34	-	6
Tax on IFRS adjustments	11)	(55)	595	540
Dividends	12)	-	1 776	2 602
Minority interests	13)	(76)	226	150
Total adjustments		319	413	2,099
Net income and shareholders’ equity – IFRS		5,677	37,650	39,693

Notes
1a) Telenor is provider of full service application and IT operating systems services. Under N GAAP, revenue from sale of software licenses and software upgrades is recognized upon their delivery. For revenue recognition related to software Telenor applies US GAAP principles (Statement of Position (SOP 97-2)) for IFRS. Revenue from sale of software licenses and software upgrades is deferred and recognized as revenue over the remaining software maintenance period as the customer does not have the right to use the software unless Telenor provides software maintenance. In addition, in conjunction with these contracts, Telenor may develop additional applications that are not essential to the use of the software. Under N GAAP, the fees for the development of the additional software are recognized based on the percentage of completion method of accounting. Under IFRS, these development fees are also deferred and recognized as revenue over the remaining software maintenance period.

This reduces equity as of 1 January 2004. Revenues and profit before taxes and minority interest for 2004 increases by NOK 51 million.

1b) Under N GAAP, revenue from telecommunications installation fees and connection fees are recognized in revenue at the time of the sale and all initial related costs are expensed as incurred. Under IFRS, such connection and installation fees that do not represent a separate earnings process are deferred and recognized over the periods that the fees are earned which is the expected period of the customer relationship. Initial related costs to the extent of the deferred revenue are also deferred over the same period.

For IFRS, Telenor applies US GAAP principles (Emerging Issue Task Force (EITF) 00-21) for allocation of the consideration for revenue recognition for arrangements that involve the delivery or performance of multiple products or services. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration is allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or other specified performance criteria. For Telenor, amounts allocated to the delivered elements are limited to the amount received in cash at the time of sale. Telenor has used the principles in EITF 00-21 for agreements entered into after 1 January 2004. Part of the connection fee has been allocated to sale of equipment and therefore recognized as revenue at the same time the equipment is recognized as revenue.

Telenor has reduced revenues in 2004 for deferred connection fees by NOK 102 million. Deferred connection fees and related costs recorded in the balance sheet are considerably higher. This has no effect on equity or net income because the related costs are also deferred, limited to the amount of deferred revenues. Costs deferred in 2004 include a reduction of materials and traffic costs of NOK 20 million; an increase in salaries and personnel expenses of NOK 24 million; and a reduction of other operating expenses of NOK 106 million.

2) Gains and losses on disposals of fixed assets and operations, expenses for workforce reductions and loss contracts are reclassified to a separate line item included in operating expenses according to IFRS.

3) Under IFRS, cumulative unrecognized actuarial losses on pension obligations of NOK 1,825 million are recorded to equity as of 1 January 2004. As a result, amortization of actuarial losses of NOK 95 million for 2004 recorded to salaries and personnel expenses is reversed for IFRS compared to the N GAAP.

4) Share-based compensation increases salary and personnel expenses by NOK 19 million for 2004 according to IFRS. This has no effect on equity.

5) According to IFRS, an asset retirement obligation exists where Telenor has a legal or constructive obligation, whether contractual, by law, or by a promissory estoppel, to settle an asset retirement obligation. Where Telenor is required to settle an asset retirement obligation, Telenor has estimated and capitalized the net present value of the obligations and increased the carrying value of the related long-lived asset, with an amount equal to the depreciated value of the asset retirement obligation. Subsequent to the initial recognition, an accretion expense is recorded relating to the asset retirement obligation, and the capitalized cost is expensed as ordinary depreciation in accordance with the related asset. Under N GAAP, asset retirement obligations are limited to expenses to material known and planned removals within a reasonable timeframe.

The accumulated effects of NOK 296 million of asset retirement obligations are recorded to equity as of 1 January 2004. Net income for 2004 is affected by the subsequent expense of NOK 46 million, of which depreciation of fixed assets is NOK 17 million and interest expense is NOK 27 million.

6) Adjustment of the fair value for the acquisition of Sonofon results in lower amortization and depreciation expense related to other intangible assets and tangible fixed assets in 2004 according to IFRS compared with N GAAP, see “(a) business combinations” above.

7) Goodwill will no longer be amortized under IFRS, beginning from 1 January 2004 but is tested for impairment on an annual basis and whenever indicators of impairment arise.

In accordance with the transitional rules in IFRS 1, negative goodwill of NOK 343 million on Utfors AB was recorded to equity as of 1 January 2004.

8) Compared with N GAAP, write-downs increase under IFRS primarily due to a larger write-down of goodwill for Sonofon. The book value of Sonofon is higher than N GAAP before the write-down at year-end 2004, because goodwill is not amortized for IFRS in 2004 and due to the restatement of the acquisition as discussed in “(a) business combinations” above.

In addition, NOK 50 million related to write-downs of goodwill on Utfors AB and Canal Digital Group due to previously not recognized deferred tax assets at acquisition of these companies. The tax assets did not satisfy the criteria for separate recognition when the business combinations were initially accounted for, but parts were realized in 2004. Both in N GAAP and IFRS the realized tax income was recognized in the profit or loss statement. According to IFRS, in addition, the acquirer shall reduce the carrying amount of goodwill and recognize the reduction as an expense. According to N GAAP, the carrying amount of goodwill is reduced and the carrying amount of deferred tax asset is increased, and the subsequent reduction in the carrying amount of deferred tax asset is recorded as a tax expense. However, according to both sets of accounting principles this procedure shall not result in the creation of an excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the combination, nor shall it increase the amount previously recognized for any such excess.

In principle, the adjustment for IFRS compared to N GAAP in the profit and loss statement should be a reclassification between write-down of goodwill and tax expense. However, due to different carrying amount of goodwill according to N GAAP compared to IFRS, the IFRS adjustment resulted in a write-down of goodwill of NOK 50 million and a tax income of only NOK 25 million in 2004.

9) Telenor’s share of equity of associated companies decreases by NOK 139 million as of 1 January 2004, of which the adjustment for the cumulative unrecognized actuarial losses on pension obligations account for NOK 104 million.

According to N GAAP, investments in entities in which Telenor has an ownership that is considered to be temporary in nature are recorded at cost or written down to fair value. Under IFRS, temporary investments in which Telenor have significant influence, normally an ownership of 20% to 50% are accounted for under the equity method. As of 1 January 2004, this decreases equity by NOK 27 million.

The accumulated effect of NOK 8 million for asset retirement obligations in associated companies was recorded to equity according to IFRS as of 1 January 2004.

For 2004, the results from associated companies increase by NOK 268 million according to IFRS compared to N GAAP mainly due to the reversal of N GAAP amortization of goodwill of NOK 254 million.

10) According to IFRS, gains on disposals of operations and financial assets increase compared to N GAAP for 2004, due to the effects of changes in pension obligations and translation differences.

11) Tax on IFRS adjustments relate primarily to pensions, asset retirement obligations and the sale of software. In addition, in 2004 a tax income of NOK 25 million is recorded for IFRS compared to N GAAP, see 8) above.

12) Under N GAAP, dividends payable reduces shareholders’ equity for the year in which it relates. Under IFRS, dividends payable is recorded
as a reduction of shareholders’ equity in the year it is approved.

13) Minority interests for IFRS adjustments relate primarily to EDB Business Partner ASA.

Cash flow statement
Telenor presents the cash flow statement with both the direct and indirect method. Telenor has not identified differences between the principles for the cash flow statement according to N GAAP and IFRS. However, since the net income for 2004 is different for IFRS compared to N GAAP, the starting point and items reconciling between net income and net cash flow from operating activities change. Net cash flow from operating activities is the same according to both sets of accounting principles.

Balance sheet
The changes described above impact the balance sheet and its classification and total assets and liabilities increase in accordance with IFRS.