Swisscom AG (2007)
Notes to the Consolidated Financial Statements [extract]
25 Financial liabilities [extract]
Financial liabilities from cross-border tax lease arrangements
Between 1996 and 2002, Swisscom entered into cross-border tax lease arrangements, under the terms of which parties of its fixed and mobile networks were to be sold or leased long-term to US Trusts and leased back with terms of up to 99 years. Swisscom has an early buyout option on these assets after a contractually agreed period.
The financial liabilities are based on lease and leaseback transactions from the years 1999, 2000, and 2002. The sale and leaseback from the year 1997 are presented as finance lease obligations.
Swisscom defeased a major part of the lease obligations through highly rated financial assets and payment undertaking agreements. The financial assets were irrevocably placed with trusts. The payment undertaking agreements were signed with financial institutions with a high credit standing. In accordance with Interpretation SIC-27 “Evaluating the substance of transactions involving the legal form of a lease”, these financial assets or payment undertaking agreements and the liabilities in the same amount are offset and not presented in the balance sheet. One of the transactions entered into in 2000 does not meet the conditions of SIC-27 and is consequently reported in the balance sheet as a long-term financial asset and the corresponding lease obligation presented as a long-term financial liability.
As of December 31, 2007, the financial assets and liabilities resulting from these transactions including interest totalled USD 4,124 million (CHF 4,679 million) and USD 3,751 million (CHF 4,250 million), respectively. Of this amount USD 2,990 million (CHF 3,387 million) are not reported in the balance sheet in accordance with SIC-27. Of the liabilities reported in the amount of CHF 1,177 million (previous year CHF 1,459 million), CHF 862 million (previous year: CHF 1,125 million) are covered by financial assets.
The gains from the transactions were recorded as financial income in the period the transactions were closed.
Swisscom is exposed to market-related risks in connection with cross-border lease agreements. One particular risk lies in the credit standing of the counterparties in which investments were made. Swisscom must fulfill the agreed rating requirements for financial assets with a nominal value of USD 559 million (CHF 634 million) including interest incurred up to December 31, 2007. All the rating requirements are fulfilled. It is possible that the contractual rating requirements will no longer be fulfilled until the agreements expire. In such case the financial assets are to be replaced by assets with the required minimum rating. Swisscom would then incur costs amounting to the difference between the market value of the existing and the new financial assets.
Other market risks in connection with cross-border lease agreements are interest rate and foreign exchange risks, although most of these risks have been hedged through interest rate and currency swaps.
Future minimum lease payments resulting from cross-border lease arrangements are due as follows: