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NORTEL NETWORKS CORPORATION
Notes to Consolidated Financial Statements
(millions of U.S. dollars, except per share amounts, unless otherwise stated)
F-6
1.
N
ortel Networks Cor
p
oration
Nortel Networks Corporation (“Nortel Networks”) is a recognized leader in delivering communications capabilities, serving both service
provider and enterprise customers. Nortel Networks delivers innovative technology solutions encompassing end-to-end broadband, Voice
over IP, multimedia services and applications, and wireless broadband solutions. Nortel Networks business consists of the design,
development, manufacture, assembly, marketing, sale, licensing, installation, servicing and support of these networking solutions. A
substantial portion of Nortel Networks business has a technology focus and is dedicated to research and development.
For 2003, Nortel Networks operations were organized into four reportable segments consisting of Wireless Networks, Enterprise
Networks, Wireline Networks and Optical Networks. See note 6 for information concerning a change in Nortel Networks organizational
structure in 2004.
The common shares of Nortel Networks Corporation are publicly traded on the New York Stock Exchange (“NYSE”) and Toronto Stock
Exchange (“TSX”) under the symbol “NT”. Nortel Networks Limited (“NNL”) is Nortel Networks principal direct operating subsidiary
and its results are consolidated into Nortel Networks results. Nortel Networks holds all of NNL’s outstanding common shares but none of
its outstanding preferred shares. NNL’s preferred shares are reported in minority interests in subsidiary companies in the consolidated
balance sheets and dividends and the related taxes on preferred shares are reported in minority interests — net of tax in the consolidated
statements of operations.
2
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g
ni
f
icant accountin
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olicies
Basis of
p
resentation
The consolidated financial statements of Nortel Networks have been prepared in accordance with accounting principles generally
accepted in the United States (“U.S.”) (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the
“SEC”) for the preparation of financial statements. Although Nortel Networks is headquartered in Canada, the consolidated financial
statements are expressed in U.S. dollars as the greater part of the financial results and net assets of Nortel Networks are denominated in
U.S. dollars.
As described in note 3, the consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for
the years ended December 31, 2002 and 2001 and the consolidated balance sheet as of December 31, 2002, including the applicable
notes, were restated.
(a)
P
rinci
p
les o
f
consolidation
The financial statements of entities which are controlled by Nortel Networks through voting equity interests, referred to as
subsidiaries, are consolidated. Entities which are jointly controlled, referred to as joint ventures, and entities which are not
controlled but over which Nortel Networks has the ability to exercise significant influence, referred to as associated companies, are
accounted for using the equity method. Variable Interest Entities (“VIEs”) (which include, but are not limited to, special purpose
entities, trusts, partnerships, certain joint ventures and other legal structures), as defined by the Financial Accounting Standards
Board (“FASB”) in FASB Interpretation (“FIN”) No. 46 (Revised 2003), “Consolidation of Variable Interest Entities — an
Interpretation of Accounting Research Bulletin No. 51” (“FIN 46R”), are entities in which equity investors do not have the
characteristics of a “controlling financial interest” or there is not sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support. VIEs are consolidated by Nortel Networks when it is determined that it will, as
the primary beneficiary, absorb the majority of the VIEs expected losses and/or expected residual returns. Intercompany accounts
and transactions are eliminated upon consolidation and unrealized intercompany gains and losses are eliminated when accounting
under the equity method.
(b) Use of estimates
Nortel Networks makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated financial statements and the reported