GAAP and IFRS

Fast Forward: TDS, U.S. Cellular Restate

The companies are seeking to correct the accounting for certain derivative contracts.
Stephen TaubNovember 7, 2006

Telephone and Data Systems and its United States Cellular subsidiary each announced that they will restate financial results for 2002 through 2005, including quarterly information for 2004 and 2005 and the first and second quarters of 2006. The main reason: to correct the accounting for a number of derivatives contracts.

TDS said the revisions concern certain variable prepaid forward contracts entered into in 2002 that are linked to its ownership of American Depository Receipts (ADRs) of Vodafone Group Plc and shares of Deutsche Telekom AG.

When TDS reviewed its accounting for the Vodafone Special Distribution in the third quarter of 2006, the company said, it found that it didn’t meet the requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities. Its missteps would not enable the company to continue hedge accounting for the forward contracts following the receipt of dividends from Vodafone in 2002 and the absence of dividends from Deutsche Telekom in 2003, TDS said.

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U.S. Cellular restatement restated because of issues tied to certain variable prepaid forward contracts entered into in 2002 related to its ownership of Vodafone ADRs. The TDS subsidiary reported that its accounting didn’t meet come up to the standards of SFAS 133 enough to continue hedge accounting for the forward contracts following the receipt of dividends from Vodafone in 2002.

Both companies admitted they did not test enough for hedge effectiveness after ceiling prices were adjusted. Thus, they must recognize changes in the fair values of the forward contracts on their balance sheets in the periods in which they occurred, rather than record them in accumulated other comprehensive income, a component of shareholders’ equity.

The companies stated that they entered into prepaid forwards in 2002 to cut the risk levels of the marketable equity securities. They made the moves to reduce risk by setting floor and ceiling prices for the securities to limit exposure, while at the same time holding on to the ability to capture a portion of the potential appreciation. “The change in accounting does not affect the economics of the forward contracts,” they added in separate announcements.

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