Telenor: Annual report 2005 > Financial statements: Telenor Group > Notes to the financial statements

Note 38: United States Generally Accepted Accounting Principles (US GAAP)

The Group's consolidated financial statements have been prepared in accordance with International Financial Reporting Standard (IFRS), which differs in certain respects from US GAAP.

The principal differences between the Group's accounting principles under IFRS and US GAAP are set out below:

Reconciliation of net income (loss) from IFRS to US GAAP

NOK in millions, except per share amounts

Note

2005

2004

Net income (loss) in accordance with IFRS

7 646

6 093

Adjustments for US GAAP:

Pensions

(312)

(140)

Stock based compensation

(37)

(35)

Sale and lease back of properties

(39)

Derivative financial instruments

(129)

(58)

Goodwill

(112)

(22)

Negative goodwill and impairment

288

Reversal of IFRS impairment and impact on disposal

(106)

Subsequent acquisitions: amortization of fair values

122

(100)

Translation difference sold business

(14)

Sale of business with extension of service contract

(256)

Lease arrangements

(152)

Provisions

175

Other differences

(26)

(116)

Tax effect of US GAAP adjustments

114

Minority interests

(22)

106

Net income in accordance with US GAAP

7 427

5 639

Earnings per share in NOK in accordance with US GAAP

– Basic earnings per share in accordance with US GAAP

4.34

3.22

– Diluted earnings per share in accordance with US GAAP

4.34

3.22

Revenues in accordance with US GAAP

70 352

67 801

Operating profit in accordance with US GAAP

11 805

6 422

Profit (loss) before taxes and minority interests

12 466

9 303

Loss from discontinued operations

(4)

Taxes in accordance with US GAAP

(3 492)

(2 658)

Minority interest in accordance with US GAAP

(1 543)

(1 006)

Reconciliation of shareholders' equity from IFRS to US GAAP

NOK in millions

Note

2005

2004

Shareholders' equity in accordance with Norwegian GAAP

46 399

40 122

Adjustments for US GAAP:

Pensions

1 448

1 760

Gains on subsidiaries' equity transactions and disposal of shares in subsidiary

700

Equity securities — net of tax

(20)

Stock based compensation

(305)

(268)

Sale and lease back of properties

(100)

(61)

Derivative financial instruments

(298)

Goodwill

6, 7

2 619

2 882

Negative goodwill

(309)

Reversal of write-downs

(208)

(102)

Subsequent acquisitions: amortization of fair value

(1 877)

(820)

Sale of business with extension of service contract

(216)

(256)

Translation differences

Lease arrangements

(152)

Provisions

175

Other differences

123

Tax effect of US GAAP adjustments

(397)

(459)

Minority interests

(706)

(685)

Shareholders’ equity in accordance with US GAAP

47 457

42 430

Total non-current assets in accordance with US GAAP

106 042

84 180

Current assets in accordance with US GAAP

25 342

16 991

Total assets in accordance with US GAAP

131 384

101 171

Non-current liabilities and provision in accordance with US GAAP

38 643

34 882

Current liabilities in accordance with US GAAP

37 315

19 438

Minority interest in accordance with US GAAP

7 969

4 759

The following table reconcile the difference between long-term liabilities and provisions under IFRS compared to US GAAP

NOK in millions

Note

2005

2004

Non-current liabilities and provision under IFRS

33 756

26 655

Pensions

(1 371)

(1 713)

Cross Border QTE Lease

6 266

5 469

Derivative financial instruments

2 787

Connection Fee

1 434

Sale of business with extension of service contract

216

256

Deferred tax on minority share of excess value recorded net under US GAAP

(84)

Sale and leaseback of properties

100

Other differences

(328)

Consolidation of variable interest entities

(4)

Non-current liabilities and provisions under US GAAP

38 643

34 882

The following table reflects the components of comprehensive income (loss) under US GAAP
Statement of Financial Accounting Standard (SFAS) 130 "Reporting Comprehensive Income" established standards for the reporting and display of comprehensive income (loss) and its components. Comprehensive income includes net income and all changes in equity during a period that arise from non-owner sources, such as foreign currency items and unrealized gains and losses on securities classified as available for sale.

2005

2004

NOK in millions

Pretax

Tax

Net

Pretax

Tax

Net

Unrealized gain (loss) on securities

1 762

(2 311)

647

(1664)

Net investment hedge

(4)

(751)

151

(600)

Minimum pension liability adjustment

113

(32)

Foreign currency translation

737

(97)

640

101

Cash flow hedge

(252)

(182)

Other comprehensive income

2 243

2 301

(2 857)

775

(2 082)

In 2005, NOK 15 million after tax was reclassified out of other comprehensive income to earnings. In 2004, NOK 1,668 million after tax was reclassified out of other comprehensive income to earnings.

Reconciliation

NOK in millions

2005

2004

Net income in accordance with US GAAP

7 427

5 639

Other comprehensive income (loss)

2 301

(2 082)

Total comprehensive income

9 728

3 557

Components of equity in accordance with US GAAP:

December 31, 2005

December 31, 2004

Share capital

10 239

10 498

Other paid capital

15 618

17 539

Other equity

22 499

17 580

Treasury shares

(700)

(687)

Accumulated other comprehensive income

– unrealized gain (loss) on securities after tax

1 777

– net investment hedge

2 651

2 655

– foreign currency adjustments

(3 729)

(4 466)

– cash flow hedge

(252)

– deferred taxes

(646)

(704)

Total

47 457

42 430

1) Pensions
Under IFRS all cumulative unrecognized actuarial gains and losses for pension obligations at the date of transition to IFRS have been recognized directly against the Shareholders Equity as of 1 January 2004. Under US GAAP unrecognized actuarial gains and losses before 1 January 2004 remained unrecognized on the balance sheet. Unrecognized actuarial gains and losses amortized to the pension obligation as part of net periodic pension cost to the extent they exceed the corridor or are recognized to the income statement when we sell a business. Under US GAAP, the transition effect of adopting SFAS 87 is also amortized over the remaining average service period.

At the end of 2005, we used the same discount rate for both IFRS and US GAAP (see Note 7 for a discussion of the discount rate). At the end of 2004, we used a lower discount rate under IFRS than for US GAAP. For US GAAP the discount rate included an assumed risk premium for corporate rate bonds over the Norwegian government bond rate. At the end of 2005, we concluded that the more conservative government bond rate could also be used as the discount rate for US GAAP. Application of a more conservative approach to determining the US GAAP discount rate is regarded as a change in estimate. The change increased the pension obligation as of 31 December 2005.

In 2005, the Group terminated part of the defined benefit plan (spouse pension) which was treated as a curtailment and settlement for IFRS. For US GAAP the gain was deferred as part of prior service costs and a part of the actuarial losses were expenses in 2005.

In accordance with US GAAP, an adjustment for an additional minimum pension liability is made when the accumulated benefit obligation (ABO) exceeds the fair value of pension plan assets and this difference also exceeds the book value of net pension obligations. Pension obligations and intangible assets are increased by this difference, to the extent of unrecognized net actuarial losses. Any remaining difference is recorded, net of tax, to the other comprehensive income component of shareholders’ equity.

There are no similar additional minimum liability requirements in accordance with IFRS

The table below set out the assumptions under IFRS and US GAAP.

	2005		2004
Assumptions used to determine benefit obligations at 31 December	IFRS	US GAAP	IFRS	US GAAP

Discount rate in %	3.9	3.9	4.5	5.0

Rate of compensation increase in %	3.0	3.0	3.0	3.0

Expected increase in the social security base amount in %	3.0	3.0	3.0	3.0

Expected turnover in %	10	10	6	6

Expected average remaining service period in years	9	9	12	12

Annual adjustments to pensions in %	2.5	2.5	3.0	3.0

Due to the differences explained above we have a difference in total provisions for pensions under US GAAP compared to IFRS. Below is an overview of benefit obligation plan assets, the total provision for pension and the pension cost under US GAAP:

NOK in millions	2005	2004

Benefit obligations at the end of the year	5 795	5 333

Fair value of plan assets at the end of the year	3 896	3 811

Funded status	1 899	1 522

Unrecognized prior service costs	52	(10)

Unrecognized net obligations at transition	(45)	(67)

Unrecognized net actuarial gains (losses)	(999)	(983)

Total provision for pensions	907	462

Presented as:
	31 December 2005	31 December 2004

Benefit obligation	984	531

Plan assets	-	(22)

Intangible assets	(77)	(47)


Total pension costs under US GAAP are as follows:
NOK in millions	2005	2004

Service cost	535	482

Interest cost	263	263

Expected return on plan assets	(187)	(189)

Losses/gains on curtailments and settlements	(1)	16

Amortization of actuarial gains and losses	128	124

Amortization of unrecognized net obligation	22	25


Net periodic benefit costs	760	721


Contribution plan costs	180	141


Total pension costs charged to profit for the year	940	862

2) Subsidiaries’ equity transactions
Under IFRS, no gains from subsidiaries’ equity transactions and sales of ownership interests in a subsidiary that increases minority interests are recognised. The resulting minority interest is measured at fair value of the consideration paid from the minority. The difference between the recorded equity in the subsidiary and value of the consideration paid by the minority will be amortized or written down through allocating results to minority.

Under US GAAP, the Group records gains from subsidiary equity transactions (SAB 51 Transactions) and sales of ownership interests in a subsidiary that increases the minority interest through income.

3) Equity securities
Under IFRS up to and including 31 December 2004, equity securities classified as available-for-sale were valued at the lower of cost and estimated fair value. From 1 January 2005, the Group implemented IAS 39 and subsequently records available-for-sale shares at estimated fair value and unrealized gains and losses, net of tax, are recorded directly to a separate component of equity until impaired or sold.

Under US GAAP, only marketable equity securities classified as available for sale are valued at their fair value in accordance with FAS 115. For marketable equity securities classified as available-for-sale, unrealized gains and losses, net of tax, are recorded directly to shareholders’ equity.

As of 31 December, 2004 and 2005, available for sale securities at cost amounted to NOK 82 million and NOK 51 million, respectively, with unrealized gains before tax of NOK 15 million as of 31 December, 2004 and NOK 1,726 million for December 31, 2005, respectively. For the years ended December 31, 2004 and 2005, proceeds from the sale of available-for-sale securities were NOK 3,304 million and NOK 76 million, respectively. The gross realized gains from such saleswere NOK 2,586 million and NOK 26 million respectively.

4) Stock based compensation
According to IFRS, the fair value of share-based compensation at the grant date is expensed over the vesting period. According to the transitional rules in IFRS 1 only options granted subsequent to 7 November 2002 that had not vested as of 1 January 2005 are included.

Under US GAAP Telenor has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. In accordance with APB 25, the measurement date for determining compensation costs for stock options is the first date at which the number of shares the employee is entitled to receive and the exercise price of the options are known. Due to the features of the plans for Telenor ASA and EDB Business Partner ASA, variable plan accounting for these options would apply under US GAAP and the intrinsic value of the options at the end of each reporting period, based on the presumed exercise price and the quoted market price of respective stocks, would be calculated and recorded as compensation expense over the vesting period.

A summary of Telenor ASA's and EDB Business Partner ASA's stock option programs and related information is given in note 31.

Under IFRS social security tax related to the exercise of the shared options is expensed over the vesting period for share options granted. Under US GAAP such social security tax is expensed at the date of the exercise of the share options.

Disclosure of pro forma information regarding net income and earnings per share for US GAAP is required by SFAS 148, "Accounting for Stock-Based Compensation", and has been determined as if Telenor and EDB Business Partner ASA had accounted for its employee stock options under the fair value method of that Statement. Had compensation cost for these plans been determined based upon fair value, the Group's net income according to US GAAP would have been the following:

NOK in millions execpt per share amounts	2005	2004

Net income as reported in accordance with US GAAP	7 427	5 639

Deduct stock based employee compensation expense included in reported net income	33	75

Add stock based employee compensation expense determined under fair value based method for all awards	(14)	(15)

Pro forma net income in accordance with US GAAP	7 446	5 699

Earnings per share in accordance with US GAAP
Basic earnings per share as reported in accordance with US GAAP	4.34	3.22

Basic pro forma earnings per share in accordance with US GAAP	4.35	3.26

Diluted earnings per share as reported in accordance with US GAAP	4.34	3.22

Diluted pro forma earnings per share in accordance with US GAAP	4.35	3.26

The stock options may have a dilutive effect. See Note 25 for number of shares used in the calculation of the basic and diluted earnings per share.

5) Sale and lease back of properties
Under IFRS, the Group recognizes gains from the sale and lease back of properties when the lease back agreements qualify as operating lease.

Under US GAAP, only gains from sale and lease back of properties that exceed the net present value of the future lease payments can be recognized as gains. The remaining gains must be deferred over the lease periods.

6) Derivative financial instruments

Due to the implementation of IAS 32 and 39 as of 1 January 2005, the only remaining difference between IFRS and US GAAP as of 31 December 2005 related to cash flow hedges as described below.

Cash flow hedges
IFRS allows hedge accounting of foreign exchange risk related to a firm commitment to acquire a business in a business combination. The currency risk related to the firm commitment to acquire Bredbandsbolaget AB in July 2005 was therefore treated as a cash flow hedge under IFRS on Group level and the loss was recorded as part of the purchase price and goodwill.

Under US GAAP, the foreign exchange risk in a firm commitment to acquire a business does not qualify as a hedged item. As a result, the purchase price for Bredbandsbolaget was lower for US GAAP than for IFRS which resulted in a lower goodwill and the loss on the hedge was included in income under US GAAP.

7) Intangibles and goodwill including amortization and impairment
Effective 1 January 2004 goodwill is no longer amortized under IFRS. Goodwill is tested at least annually for impairment under IFRS and whenever impairment indicators arise. The recoverable amount of a cash generating unit (CGU) is the higher of (a) fair value less costs to sell and (b) value in use. If the recoverable amount is less than the carrying amount of the CGU, the book value of goodwill will be written down to the recoverable amount.

The carrying value of goodwill for IFRS differs compared to US GAAP because of
• the different timing for discontinuing amortization of goodwill, and
• the differences in historical impairments arising from the two-step methodology for impairment testing in US GAAP compared to IFRS as described below.

Under SFAS No. 142, goodwill was no longer amortized effective from 1 January 2002, but is tested for impairment on an annual basis and whenever indicators of impairment arise. SFAS No. 142 prescribes a two-step process for impairment testing of goodwill. In the first phase Telenor identifies reporting units where goodwill must be tested for impairment by comparing net assets of each reporting unit to the respective fair value. In the second step (if necessary), the the fair value of each of the unit's assets and liabilities are determined. The excess of the fair value of the reporting unit over the combined fair value of its other assets and liabilities is the implied fair value of goodwill.

Telenor completed its first step impairment analysis at the end of 2004 and 2005. In 2004, Telenor found one reporting unit with a carrying value in excess of the fair value, based on valuation methods determined with the assistance of external valuations experts. Accordingly, the second testing step was necessary and was performed with assistance of the same valuation experts. This resulted in an impairment loss on goodwill of NOK 2,902 million under US GAAP compared to an impairment loss of NOK 3,074 million under IFRS.

Below is a summary of goodwill and intangible assets under US GAAP.

Intangible assets:

Accumulated Cost

Cost as
of 1
January 2005

Additions
2005

Exchange
differences
and
reclassi-
fications
2005

Disposals
2005

Cost as
of 31
December
2005

Acc.
Amortizations
and write-
downs as of
1 Jan. 2005

Amortizations
and write-
downs 2005

Acc.
Amortizations
and write-
downs as of
31 Dec. 2005

Carrying
amount as
of 31
December
2005

Carrying
amount
as of 1
January
2005

Goodwill

21 381

8 157

(281)

(153)

29 104

(5 257)

(5 228)

23 874

16 124

Intangible assets

Customer base

4 511

971

(164)

(9)

5 309

(1 891)

(1 125)

(3 016)

2 293

2 620

licenses

4 506

595

199

(23)

5 277

(1 293)

(238)

(1 531)

3 746

3 213

Trade marks

1 014

536

(17)

1 533

(200)

(96)

(296)

1 237

814

Other

7 985

2 462

(136)

10 392

(5 220)

(1 608)

(6 828)

3 564

2 765

work in progress

422

286

(1)

707

422

Intangible assets (excl goodwill)

18 438

4 850

(168)

23 218

(8 604)

(3 067)

(11 671)

11 547

9 834

Total intangible assets

39 819

13 007

(185)

(321)

52 320

(13 861)

(3 038)

(16 899)

35 421

25 958

Changes in book value of goodwill:

	Sonofon	Pannon	DiGi.Com	Kyivstar	Other Mobile	Fixed	Broadcast	Other/ eliminations	Total Group

As of 31 December 2003	-	5 623	744	347	-	-	3 029	2 287	12 030

Exchange differences	(421)	227	(71)	(36)	(2)	13	19	68	(203)

Arising on acquisition

of a subsidiaries	6 792	-	-	4	104	25	(23)	459	7 361

Eliminated on

disposal of subsidiaries	-	-	-	-	-	-	-	(111)	(111)

Amortization

and impairment	(2 902)	-	-	-	-	-	-	(4)	(2 906)

Previously not

recognised deferred

tax assets in business

combinations	-	-	-	-	-	(23)	(24)	-	(47)

As of 31 December 2004	3 469	5 850	673	315	102	15	3 001	2 699	16 124

Exchange differences	(116)	(335)	86	56	52	68	(14)	(5)	(208)

Arising on acquisition

of a subsidiaries	1	-	-	-	2 544	5 556	4	52	8 157

Eliminated on disposal

of subsidiaries	-	-	-	-	-	(43)	-	(110)	(153)

Amortization

and impairment	-	-	-	-	-	36	-	(7)	29

Previously not

recognised deferred

tax assets in business

combinations	-	-	-	-	-	-	(75)	-	(75)

As of 31 December 2005	3 354	5 515	759	371	2 698	5 632	2 916	2 629	23 874

8) Negative goodwill and impairment of fixed assets
Under IFRS negative goodwill (the difference when fair value assigned to assets acquired and liabilities assumed exceeds the purchase price of the acquired entity) was recorded directly against equity at the time of implementation of IFRS. Under US GAAP negative goodwill was allocated as a pro rata reduction to assets.

The entity that had a negative goodwill difference was tested for impairment at year end 2005 both under IFRS and US GAAP. The impairment test resulted in a write down of fixed assets to fair values both under IFRS and US GAAP. Since the USGAAP book value of the property, plant and equipment was lower than under IFRS due to the allocation of negative goodwill the impairment was NOK 288 million lower for US GAAP than for IFRS.

9) Reversal of impairment and impact on disposals
Under IFRS, impairments of property, plant and equipment and intangible assets (excluding goodwill) must be reversed if the factors that triggered the impairment are no longer valid and the underlying asset have recovered its value. The same applied to impairment losses on financial instruments available-for-sale before implementing IAS 39.

Under US GAAP, the reversal of impairments is not permitted.

When such assets are sold, the resulting gain or loss will be different for IFRS and US GAAP due to the variance in the carrying value of the assets

10) Subsequent acquisitions of ownership interest in subsidiaries and amortization of fair values
Under IFRS, when a less than 100% owned subsidiary is initially acquired, the fair value of identifiable assets and liabilities are estimated and recorded at 100% basis at the date Telenor obtains control. A portion of the fair value of identifiable assets and liabilities are allocated to the minority interests. If ownership is subsequently increased in a consolidated subsidiary the carrying value of the identifiable assets and liabilities in the group accounts will not change. Only goodwill will be adjusted. Goodwill is calculated and recorded for each transaction based on the difference between the purchase price and the estimated fair value of identifiable assets and liabilities at the time of purchase. However, any difference between the consolidated carrying value and estimated fair value of the other identifiable assets and liabilities is not recorded to individual assets or liabilities but is adjusted directly against shareholders’ equity.

Under US GAAP each transaction is treated separately for the purposes of determining the pro rata allocation of fair value of identifiable assets and liabilities based upon the ownership interest acquired and any resulting goodwill. The minority interest is valued at the historical carrying value of the assets and liabilities in the subsidiary.

As a result of the different values assigned to identifiable assets, amortization and depreciation under IFRS and US GAAP will not be the same.

11) Taxes
Income taxes for US GAAP differ from income taxes for IFRS because the income tax effects of the US GAAP adjustments are recorded as deferred taxes.

12) Cross border QTE leases
The Group has entered into Cross Border QTE Leases for telephony switches, the GSM Mobile network and the fixed-line network. Telenor has defeased all amounts due by us under these agreements. The leasing obligations and the defeased amounts are shown net on the balance sheet.

Under both IFRS and US GAAP Telenor has deferred the gain from the transactions since there is more than a remote possibility of loss of the gain due to indemnification or the outcome of other contingencies.

Under US GAAP, assets and liabilities may not be offset except when there exists the legal right to offset the asset and liability. The right to offset the defeased amounts against the future lease obligations does not legally exist. Therefore, under US GAAP, the defeased amounts and the Group's future obligations under the QTE Leases are recorded gross on the consolidated balance sheet as financial assets and non-current interest-bearing liabilities. This increased financial assets and non-current interest-bearing liabilities by approximately NOK 6,266 million for the year ended 31 December 2005 and NOK 5,469 million for the year ended 31 December 2004. This did not affect the income statement or shareholder's equity.

At 31 December 2005, future minimum lease payments under finance leases were as follows under US GAAP:

NOK in millions	As of 31 December 2005

2006	953

2007	897

2008	1 039

2009	930

Later years through 2016	6 193

Total future minimum lease payments	10 011

Less amount representing interest	1 599

Finance lease obligation under US GAAP	8 412

Finance lease obligation under IFRS	1 838

Deferred gain (both IFRS and US GAAP)	308

Book value of finance lease included in property, plant and equipment

NOK in millions

2005

2004

Telephony switches

GSM mobile network

135

Fixed-line network

542

804

Fiber optic Networks

475

Satellites

518

501

Set top boxes

110

Buildings

187

189

Other

Total

1 789

1 827

13) Consolidation of variable interest entities
On 31 March 2004, Telenor implemented FASB Financial Interpretation (FIN) No. 46R, an interpretation which requires Telenor to consolidate an entity which is subject to the guidance in FIN 46R (a VIE) and in which it holds a variable interest. A variable interest is a contractual arrangement which entitles the holder to absorb a portion of the entity's future losses and/or receive a portion of the entity's residual returns and can take a variety of forms. The more common of which are holdings in equity or debt securities a guarantee issued by Telenor and even service control. The party which is exposed to the majority of future losses or entitled to a majority of the residual returns through a single variable interest (a combination of interests) is referred to as the primary beneficiary and must consolidate.

As a result of its adoption of FIN 46R Telenor concluded that Bravida ASA was a VIE and that it was the primary beneficiary. Hence, Telenor had to consolidate the company. Bravida was previously accounted for using the equity method of accounting and its operations consisted primarily of Telecom, Information Technology, Electricity, Plumbing and Ventilation and Geomatics. The consolidation of Bravida did not require an adjustment to reflect the cumulative effect of our change in accounting principle.

FIN 46R contains provisions that require consolidated or unconsolidated entities to be re-evaluated when certain events occur that could alter an entity's VIE status or which could result in a change to the entity's primary beneficiary. In October 2004 certain of Telenor's holdings in Bravida were sold through sale of its shareholders' loans. In addition, on 30 December 2004 Telenor further reduced its holdings in Bravida through its sale of a significant part of its shareholders loan in Bravida. Following these transactions Telenor concluded that it no longer absorbs a majority of Bravida's expected losses, or receive a majority of Bravida's expected residual returns. Telenor ceased consolidating Bravida on 30 December 2004. Bravida had net assets of NOK 4.9 billion at year end 2004. Telenor included revenues of NOK 7,129 million and operating profit of NOK 95 million in the period Bravida was consolidated. Telenor's maximum exposure to any potential losses, should they occurassociated with Bravida is limited to the equity investments and shareholders loans of total NOK 134 million in addition to receivables in the normal course of business and guarantees given to Bravida. See note 34 to the consolidated financial statements.

In connection with its FIN 46R analysis in 2004, Telenor also identified variable interests it holds in two entities, DTAC and UCOM which Telenor qualitatively concluded were at high risk of being deemed a VIE, but in which Telenor determined would not be considered the primary beneficiary, and consequently did not consolidate the VIEs.

In 2005 Telenor acquired additional economic stakes in DTAC and UCOM and had controlling interests of the companies as of year end 2005. As a result. Telenor consolidated DTAC and UCOM from the date of aquisition for both IFRS and US GAAP. See Note 1 for more information.

At the end of 2004 , Telenor sold a 51% stake in Kjedehuset (previously wholly owned) to independent third parties and at the same time entered into certain franchise and service agreements with theseparties. Kjedehuset is a trade association for independent mobile phone dealers in Norway and acts as a conduit for marketing support and receives a bonus from Telenor. Telenor concluded that Kjedehuset is a VIE and that it was the primary beneficiary. Hence Telenor consolidated the company in 2004 and 2005.

Under IFRS, consolidation is based on the concept of control and the concept of FIN 46R does not apply. Therefore entities consolidated based on variable interest under FIN 46R will generally not be consolidated under IFRS.

14) Sale of business with extension of service contract
In 2004 EDB Business Partner ASA entered into an agreement to sell parts of the Telecom area. At the same time Telenor entered into a service agreement with the buyer for the same services Telenor previously purchased from EDB Business Partner ASA. Under the agreement, Telenor is committed to a minimum purchase of application management and maintenance. The agreement is on marketable terms and under IFRS a gain of NOK 283 million was recorded in 2004 on the sale of the parts of the Telecom area.

In accordance with US GAAP, the gain on the transaction is deferred and recognized over the term of the purchase agreement.

15) Non-consolidated investees – 100 percent basis
The following table sets forth summarized unaudited financial information of Telenor’s non-consolidated investees on a 100 percent combined basis. Telenor’s share of these investments is accounted for using the equity method.

NOK in millions	2005	2004

Income Statement Data
Revenues	42 336	41 643

Operating Profit	7 383	6 800

Income before taxes and minority interest	6 737	5 094

Net income	4 513	6 341

Balance Sheet Data
Total non-current assets	47 652	49 007

Total current assets	11 791	13 494

Total assets	59 443	62 501

Shareholders’ equity	25 215	24 516

Minority interests	1 478	428

Total non-current liabilities	23 373	21 095

Total current liabilities	9 377	16 462

Total equity and liabilities	59 443	62 501

16) Cumulative translation differences
At the date of transition to IFRS all cumulative transition differences which related to foreign operations and financial instruments used to hedge such investments were nullified 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 had no effect on the total equity as of 1 January 2004.

For US GAAP, the historical cumulative translation differences as of 1 January 2004 were NOK 2 billion. These differences are reversed from equity and included in the computation of the gain or loss on sales when entities are sold that reported in a currency other than Norwegian Krone.

17) Lease arrangements
Under IFRS, prepaid leases payments made on entering into leases or acquiring leaseholds that are accounted for as operating leases are amortized over the lease term in accordance with the pattern of benefits provided as part of depreciation and amortization expense. They relate primarily to access charges for lease of the copper cables of other operators (local loop unbundling etc). The amortization period for access charges is the estimated life of the customer relationship based upon past history.

Under US GAAP prepaid leases are amortized over the shorter of the useful life or the lease term and included in operating expenses. Since most of these agreements do not have a minimum lease term, the prepaid leases are expensed as incurred.

18) Provisions
Under IFRS, provisions are recognised when Telenor has a minimum payment obligation from an agreement (onerous contract) and has decided not to use the services under the agreement in future periods.

Under US GAAP a liability cannot be recognized before the contract is terminated or Telenor stop using the benefits from the contract.

19) Revenue recognition
Telenor complies with the requirements for revenue recognition, as provided by the SEC Staff Accounting Bulletin (SAB) 104, follows guidance of EITF 00-21 regarding contracts with multiple deliverables and utilizes Statement of Position (SOP) 97-2 for software related sales. For the periods presented, no differences have been identified between Telenor’s IFRS accounting policies adopted for revenue recognition and US GAAP.

However, as a result of consolidating certain entities under FIN 46 and lease arrangements (see above) revenues for US GAAP are higher than for IFRS.

20) New US Accounting Standards
SFAS 123 (Revised 2004)
On December 16 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment which is a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees and amends FASB Statement No. 95 Statement of Cash Flows.

Generally the approach to accounting for share-based payments in Statement 123(R) is similar to the approach described in Statement 123. However Statement 123(R) requires all share-based payments to employees including grants of employee stock options to be recognized in the financial statements based on their fair values (i.e., pro forma disclosure is no longer an alternative to financial statement recognition). Statement 123(R) is effective for annual period beginning after 15 June 2005. Implementation of SFAS 123(R) will not have a material effect on revenues, total assets or net income.

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