EXHIBIT 2
Reconciliation of Canadian GAAP to United States GAAP
We, our and BCE means BCE Inc., its subsidiaries and joint ventures.
Our unaudited interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). This reconciliation of Canadian GAAP to United States GAAP should be read in conjunction with our unaudited interim consolidated financial statements for the three months ended March 31, 2009. We believe that this reconciliation reflects all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results for the interim periods shown. Material differences between Canadian GAAP and United States GAAP are quantified and described below:
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Consolidated Statements of Operations
For the three months ended March 31 | ||
(in $ millions, except share amounts) (unaudited) | 2009 | 2008 (o) |
Earnings from continuing operations – Canadian GAAP | 411 | 291 |
Differences | ||
Cost of revenue, exclusive of depreciation and amortization | ||
Leases (i) | (1) | (5) |
Selling, general and administrative expenses | ||
Employee benefit plans (b) | (47) | 7 |
Depreciation and amortization expense | ||
Deferred costs and finite-life intangible assets (a) | 1 | 2 |
Capitalized interest (g) | (18) | (18) |
Leases (i) | 1 | 4 |
Other income (expense) | ||
Restructuring and other (a) | 7 | - |
Other | (2) | - |
Interest expense | ||
Capitalized interest (g) | 23 | 26 |
Income taxes | ||
Tax effect of the above items | 12 | (4) |
Unrecognized tax benefits (h) | (9) | (18) |
Non-controlling interest (o) | 82 | 75 |
Earnings from continuing operations – U.S. GAAP | 460 | 360 |
Discontinued operations – Canadian GAAP | (5) | (2) |
Difference (o) | - | (1) |
Discontinued operations U.S. GAAP | (5) | (3) |
Net earnings – U.S. GAAP | 455 | 357 |
Net earnings attributable to the non-controlling interest (o) | (82) | (75) |
Net earnings attributable to BCE | 373 | 282 |
Dividends on preferred shares – Canadian and U.S. GAAP | (29) | (31) |
Net earnings attributable to BCE common shareholders – U.S. GAAP | 344 | 251 |
Net earnings per common share – basic, U.S. GAAP | ||
Continuing operations | 0.44 | 0.32 |
Discontinued operations | (0.01) | - |
Net earnings | 0.43 | 0.32 |
Net earnings per common share – diluted, U.S. GAAP | ||
Continuing operations | 0.44 | 0.31 |
Discontinued operations | (0.01) | - |
Net earnings | 0.43 | 0.31 |
Average number of common shares outstanding – basic (millions) | 788.3 | 805.3 |
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Consolidated Statements of Comprehensive Income
For the three months ended March 31 | ||
(in $ millions) (unaudited) | 2009(o) | 2008(o) |
Other comprehensive income, net of income taxes and non-controlling interest – Canadian GAAP | 63 | 50 |
Differences | ||
Net change in unrealized gains and losses on derivatives designated as cash flow hedges | 1 | (1) |
Benefit plans(b) (c) | 45 | (7) |
Other comprehensive income, net of income taxes – U.S. GAAP | 109 | 42 |
Net earnings – U.S. GAAP | 455 | 357 |
Comprehensive income – U.S. GAAP | 564 | 399 |
Comprehensive income attributable to non-controlling interest(o) | (85) | (71) |
Comprehensive income attributable to BCE | 479 | 328 |
Consolidated Statements of Accumulated Other Comprehensive Loss
| March 31, | December 31, |
(in $ millions) (unaudited) | 2009(o) | 2008(o) |
Currency translation adjustment | 1 | (2) |
Available-for-sale financial assets and derivatives designated as cash flow hedges(e) | 79 | 18 |
Benefit plans(b) (c) | ||
Net actuarial losses | (2,041) | (2,090) |
Net past service costs | 64 | 68 |
Net transitional obligations | (2) | (2) |
Accumulated other comprehensive loss – U.S. GAAP | (1,899) | (2,008) |
Accumulated other comprehensive income attributable to non-controlling interest(o) | 507 | 510 |
Accumulated other comprehensive income attributable to BCE – U.S. GAAP | (1,392) | (1,498) |
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Consolidated Balance Sheets
| March 31, | December 31, | ||||
| 2009(o) | 2008(o) | ||||
| Canadian | U.S. | Canadian | U.S. | ||
(in $ millions) (unaudited) | GAAP | Differences | GAAP | GAAP | Differences | GAAP |
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | 2,363 | - | 2,363 | 3,059 | - | 3,059 |
Accounts receivable | 1,678 | - | 1,678 | 1,837 | - | 1,837 |
Future income taxes | 88 | - | 88 | 86 | - | 86 |
Inventory | 268 | - | 268 | 272 | - | 272 |
Prepaid and other expenses | 443 | - | 443 | 304 | - | 304 |
Current assets of discontinued operations | 31 | - | 31 | 20 | - | 20 |
Total current assets | 4,871 | - | 4,871 | 5,578 | - | 5,578 |
Capital assets | ||||||
Property, plant and equipment (i) (g) | 19,255 | 593 | 19,848 | 19,407 | 586 | 19,993 |
Finite-life intangible assets (a) (g) | 2,701 | 51 | 2,752 | 2,697 | 51 | 2,748 |
Indefinite-life intangible assets | 3,710 | - | 3,710 | 3,697 | - | 3,697 |
Total capital assets | 25,666 | 644 | 26,310 | 25,801 | 637 | 26,438 |
Other long-term assets(m) | 2,662 | (1,868) | 794 | 2,613 | (1,874) | 739 |
Goodwill(f) | 5,663 | 64 | 5,727 | 5,659 | 64 | 5,723 |
Non-current assets of discontinued operations | 14 | - | 14 | 12 | - | 12 |
Total assets | 38,876 | (1,160) | 37,716 | 39,663 | (1,173) | 38,490 |
LIABILITIES | ||||||
Current liabilites | ||||||
Accounts payable and accrued liabilites | 3,145 | - | 3,145 | 3,538 | - | 3,538 |
Interest payable | 167 | - | 167 | 139 | - | 139 |
Dividends payable | 345 | - | 345 | 337 | - | 337 |
Debt due within one year(i) (k) | 2,196 | 13 | 2,209 | 2,201 | 12 | 2,213 |
Current liabilities of discontinued operations | 25 | - | 25 | 12 | - | 12 |
Total current liabilities | 5,878 | 13 | 5,891 | 6,227 | 12 | 6,239 |
Long-term debt(e) (i) (k) | 10,133 | 23 | 10,156 | 10,099 | 25 | 10,124 |
Other long-term liabilities(m) | 4,908 | 109 | 5,017 | 4,946 | 110 | 5,056 |
Total liabilities | 20,919 | 145 | 21,064 | 21,272 | 147 | 21,419 |
Non-controlling interest in subsidiaries(o) | 1,072 | (1,072) | - | 1,080 | (1,080) | - |
SHAREHOLDERS’ EQUITY(l) (o) | ||||||
BCE shareholders’ equity | ||||||
Preferred shares | 2,770 | - | 2,770 | 2,770 | - | 2,770 |
Common shares(j) | 13,148 | (65) | 13,083 | 13,525 | (65) | 13,460 |
Treasury stock | (95) | - | (95) | (86) | - | (86) |
Contributed surplus(f) | 2,505 | (1,538) | 967 | 2,531 | (1,540) | 991 |
Accumulated other comprehensive income (loss) | 102 | (1,494) | (1,392) | 39 | (1,537) | (1,498) |
(Deficit) retained earnings | (1,545) | 2,276 | 731 | (1,468) | 2,309 | 841 |
Total BCE shareholders’ equity | 16,885 | (821) | 16,064 | 17,311 | (833) | 16,478 |
Non-controlling interest in subsidiaries | - | 588 | 588 | - | 593 | 593 |
Total shareholders’ equity | 16,885 | (233) | 16,652 | 17,311 | (240) | 17,071 |
Total liabilities and shareholders’ equity | 38,876 | (1,160) | 37,716 | 39,663 | (1,173) | 38,490 |
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Consolidated Statements of Cash Flows
For the three months ended March 31 | ||
(in $ millions) (unaudited) | 2009 | 2008 |
Cash flows from operating activities – Canadian GAAP | 924 | 902 |
Difference | ||
Capitalized interest(g) | 23 | 26 |
Cash flows from operating activities – U.S. GAAP | 947 | 928 |
Cash flows used in investing activities – Canadian GAAP | (629) | (600) |
Difference | ||
Capitalized interest(g) | (23) | (26) |
Cash flows used in investing activities – U.S. GAAP | (652) | (626) |
Cash flows used in financing activities – Canadian and U.S. GAAP | (986) | (467) |
Cash flows used in continuing operations – U.S. GAAP | (691) | (165) |
Cash flows used in discontinued operations activities – Canadian and U.S. GAAP | (7) | (11) |
Net decrease in cash and cash equivalents | (698) | (176) |
Cash and cash equivalents at beginning of period | 3,063 | 2,658 |
Cash and cash equivalents at end of period | 2,365 | 2,482 |
Consists of: | ||
Cash and cash equivalents of continuing operations | 2,363 | 2,477 |
Cash and cash equivalents of discontinued operations | 2 | 5 |
Total | 2,365 | 2,482 |
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Description of United States GAAP Differences
All amounts are in millions of Canadian dollars, except where noted (unaudited).
(a) Deferred Costs and Finite-life Intangible Assets
Under Canadian GAAP, certain expenses, are deferred and amortized or otherwise expensed in a subsequent period if they meet specified criteria. Under United States GAAP, these costs are expensed as incurred.
(b) Employee Benefit Plans
Under United States GAAP, we recognize the funded status of benefit plans in the balance sheet by aggregating overfunded plans separately from underfunded plans and recording the resulting amounts as an asset and a liability, respectively. We also recognize as a component of other comprehensive income, net of tax, the actuarial gains or losses and past service costs or credits that arise during the period. Under Canadian GAAP, these amounts are not recorded on the balance sheet until the period in which they affect earnings.
Also, under Canadian GAAP, we recognize a pension valuation allowance for any excess of the accrued benefit asset over the related expected future benefit. Changes in the pension valuation allowance are recognized in the consolidated statement of operations. United States GAAP does not permit pension valuation allowances. Differences also arise from the use of the corridor method to amortize actuarial gains and losses for Canadian GAAP purposes.
(c) Post-Employment Benefits
In 2007, we announced the phase-out of other post-employment benefits for future retirees over the next 10 years. Under Canadian GAAP, this plan amendment reduces the unamortized transitional obligation and increases past service credits amortized over the expected average remaining service lives (EARSL) of affected employees. Under United States GAAP, this plan amendment was reflected as an increase in other comprehensive income (loss) of $209 million in June, 2007.
(d) Income from Joint Ventures
Under Canadian GAAP, we account for our interests in joint ventures using the proportionate consolidation method. Under United States GAAP, these interests would be accounted for using the equity method. This difference is not reflected in our United States GAAP reconciliation for those joint venture interests that qualify for the related accommodation provided by the United States Securities and Exchange Commission.
Our joint venture interests accounted for using the proportionate consolidation method are not material to our financial position or results of operations.
Certain joint venture interests have been accounted for as discontinued operations under Canadian GAAP. Under United States GAAP, we must continue to reflect these investments in continuing operations. Our proportionate interest in joint venture results of operations and any gain or loss on disposal are reclassified from discontinued operations under Canadian GAAP to continuing operations under United States GAAP.
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Description of United States GAAP Differences
(e) Derivative Instruments and Hedging Activities
Under Canadian GAAP, foreign-currency derivatives embedded in a non-financial instrument host contract are not bifurcated and separately accounted for when specified conditions are met.
Differences may also arise with respect to the measurement of hedge ineffectiveness recorded in earnings.
(f) Sale of Businesses, Business Combinations and Goodwill
Under Canadian GAAP, certain business combinations have been accounted for at the carrying value of the underlying assets and liabilities exchanged, whereas under United States GAAP such transactions were recorded on a fair value basis. Also, differences between Canadian GAAP and United States GAAP may cause corresponding differences in the carrying values of the net assets of businesses sold, including those classified as discontinued operations. Changes in our ownership interest in these businesses will cause a corresponding difference in any resulting gains or losses.
BCE’s ownership interest in Bell Aliant was reduced through a distribution of trust units by way of a return of capital to holders of BCE Inc. common shares on July 10, 2006. This distribution resulted in an increase in contributed surplus of $1,547 million for Canadian GAAP. For United States GAAP purposes, the distribution of trust units is deemed to have occurred at fair value, with the resulting gain recognized in earnings. Therefore, the increase in contributed surplus under Canadian GAAP, adjusted for previously existing United States and Canadian GAAP differences, was recorded as a gain on distribution of trust units in earnings from continuing operations for United States GAAP purposes.
(g) Capitalized Interest
Under Canadian GAAP, we capitalize interest for significant assets under construction. Under United States GAAP, borrowing costs must be capitalized for all qualifying assets under construction.
(h) Income Taxes
Under United States GAAP an income tax position is recognized when it is more likely than not that it will be sustained upon examination based on its technical merits, and is measured as the largest amount that is greater than 50% likely to be realized upon settlement. Under Canadian GAAP, we recognize and measure income tax positions, including any related accruals for interest and penalties, based on our best estimate of the amount that is more likely than not to be realized.
BCE and its subsidiaries are subject to either Canadian federal and provincial income tax, United States federal, state or local income tax. BCE has substantially concluded all Canadian federal and provincial income tax matters for the years through 2000. Canadian federal income tax returns for taxation years ended December 31, 2001 through December 31, 2007 are currently under examination by the Canada Revenue Agency, which to date has not proposed any significant adjustments. No material matters pertaining to United States federal, state or local income tax matters are currently outstanding.
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Description of United States GAAP Differences
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in $ millions) (unaudited) | |
Balance at January 1, 2009 | 662 |
Increase for tax positions of prior years | 16 |
Decrease for tax positions of prior years | (9) |
Balance at March 31, 2009 | 669 |
The balance of $669 million at March 31, 2009 includes $224 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility. The disallowance of a shorter deductibility period would not affect the effective tax rate, except with respect to interest and penalties and the impact of declining income tax rates. The remaining $445 million of unrecognized tax benefits would, if recognized, favourably affect the effective income tax rate in any future periods. Subject to the results of audit examinations by taxing authorities and to legislative amendments, BCE does not anticipate adjustments to the amount of unrecognized tax benefits during the next twelve months that would have a material impact on its financial statements.
BCE records interest and penalties related to income tax positions in income tax expense. For the three months ended March 31, 2009, BCE recognized approximately $6 million in interest and penalties (2008 – $11 million). BCE had accrued $181 million for interest and $ nil for penalties at March 31, 2009 and $175 million and $ nil respectively, at December 31, 2008.
(i) Leases
Under United States GAAP, leases entered into during the last 25% of the total estimated economic life of the leased asset are classified as operating leases unless we expect to obtain ownership of the leased asset by the end of the lease term. Under Canadian GAAP, we account for such leases as capital leases when we obtain substantially all of the benefits and risks incident to ownership of the leased asset.
(j) Share Issue Costs
Under United States GAAP, share issue costs are recorded as a reduction of the proceeds raised from the issuance of capital stock, whereas under Canadian GAAP we charge share issue costs to deficit.
(k) Debt Issue Costs
Under United States GAAP, debt issue costs incurred in connection with the issuance of debt securities or other long-term borrowings are recorded as deferred charges and amortized over the term of the debt. Under Canadian GAAP, these costs are classified with the corresponding debt on the balance sheet.
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Description of United States GAAP Differences
(l) Changes in Shareholders’ Equity
| Accumulated | ||||||
For the three months ended | Common | other | Non- | ||||
March 31, 2009 | Preferred | shares, | Contributed | comprehensive | Retained | controlling | |
(in $ millions) (unaudited) | Total | shares | net | surplus | income | earnings | interest |
Beginning balance | 17,071 | 2,770 | 13,374 | 991 | (1,498) | 841 | 593 |
Net earnings | 455 | 373 | 82 | ||||
Other comprehensive income | |||||||
Net change in unrealized gains (losses) on available-for-sale financial assets | 59 | 59 | - | ||||
Net change in gains and losses on derivatives designated as cash flow hedges | 2 | 1 | 1 | ||||
Net change in currency translation adjustment | 3 | 3 | - | ||||
Benefit plans | 45 | 43 | 2 | ||||
Other comprehensive income | 109 | ||||||
Net repurchase of BCE common shares | (566) | (387) | (27) | (152) | |||
Dividends on BCE common and preferred shares | (331) | (331) | |||||
Cash dividends/distributions paid by subsidiaries to non-controlling interest | (92) | (92) | |||||
Other | 6 | 1 | 3 | 2 | |||
| 16,652 | 2,770 | 12,988 | 967 | (1,392) | 731 | 588 |
| Accumulated | ||||||
For the three months ended | Common | other | Non- | ||||
March 31, 2008 | Preferred | shares, | Contributed | comprehensive | Retained | controlling | |
(in $ millions) (unaudited) | Total | shares | net | surplus | income | earnings | interest |
Beginning balance | 17,748 | 2,770 | 13,471 | 997 | (876) | 631 | 755 |
Net earnings | 357 | 282 | 75 | ||||
Other comprehensive income | |||||||
Net change in unrealized gains (losses) on available-for-sale financial assets | 43 | 43 | - | ||||
Net change in gains and losses on derivatives designated as cash flow hedges | 7 | 8 | (1) | ||||
Net change in currency translation adjustment | (1) | (1) | - | ||||
Benefit plans | (7) | (4) | (3) | ||||
Other comprehensive income | 42 | ||||||
Dividends on BCE common and preferred shares | (325) | (325) | |||||
Cash dividends/distributions paid by subsidiaries to non-controlling interest | (90) | (90) | |||||
Other | 6 | 1 | 1 | 4 | |||
| 17,738 | 2,770 | 13,472 | 998 | (830) | 588 | 740 |
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Description of United States GAAP Differences
(m) Other Long-Term Assets and Other Long-Term Liabilities
| March 31, | December 31, |
(in $ millions) (unaudited) | 2009 | 2008 |
Other long-term assets | ||
Deferred costs(a) | - | (7) |
Employee benefit plans(b) | (2,753) | (2,763) |
Future income taxes(h) | 845 | 854 |
Debt issue costs(k) | 40 | 42 |
| (1,868) | (1,874) |
| March 31, | December 31, |
(in $ millions) (unaudited) | 2009 | 2008 |
Other long-term liabilities | ||
Employee benefit plans(b) | 246 | 236 |
Future income taxes and unrecognized tax benefits(h) | (137) | (126) |
| 109 | 110 |
(n) Guarantees
Under Canadian GAAP, guarantees do not include indemnifications against intellectual property right infringement. Under United States GAAP, these indemnifications are included in guarantees. At March 31, 2009, such indemnifications amounted to $76 million (2008 – $175 million), of which $20 million expires in 2009, $25 million in 2010, $5 million in 2011, nil in 2012, $20 million in 2013 and thereafter, and $6 million with an indefinite term.We also have guarantees where no maximum potential amount is specified.
(o) Recently Adopted Accounting Changes
Effective January 1, 2009, we prospectively adopted FASB Statements No. 141 (revised 2007), Business Combinations (“FAS 141(R)”). The most significant changes resulting from the adoption of FAS 141(R) include:
100 per cent of the fair value of assets acquired, liabilities assumed, and non-controlling interest is recognized in acquisitions of less than a 100 per cent controlling interest in an acquired entity when the acquisition results in a change in control of the acquired entity;
Contingent consideration arrangements are recognized at their acquisition-date fair values;
Acquisition-related transaction costs are expensed as incurred; and
Acquisition-related restructuring costs are capitalized only if certain criteria are met as of the acquisition date.
Effective January 1, 2009, we also adopted FASB Statement No. 160, Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“FAS 160”). Under FAS 160, non-controlling interest in subsidiaries is presented in the consolidated balance sheets as a separate component of shareholders’ equity. Changes in ownership interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions instead of resulting in dilution gains or losses recorded through income. Changes in ownership interests that result in a loss of control and require deconsolidation trigger full gain or loss recognition by measuring any remaining ownership interests at fair value. FAS 160 also requires that net earnings reported in the consolidated statements of operations and other comprehensive income include amounts attributable to the non-controlling interest.
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Description of United States GAAP Differences
FAS 160 has been applied prospectively, except for the presentation and disclosure requirements which have been applied retrospectively. Net earnings include net earnings attributable to non-controlling interest of $82 million and $75 million for the three months ended March 31, 2009 and March 31, 2008, respectively. Total shareholders’ equity includes non-controlling interest in subsidiaries of $588 million and $593 million at March 31, 2009 and December 31, 2008, respectively.
(p) Future Accounting Changes
In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.
We currently are evaluating the impact of the adoption of FSP 157-4, effective for periods ending after June 15, 2009.
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