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F-9
Research and development (“R&D”) costs are charged to net earnings (loss) in the periods in which they are incurred. However,
costs incurred pursuant to specific contracts with third parties for which Nortel Networks is obligated to deliver a product are
charged to cost of revenues in the same period as the related revenue is recognized. Related global investment tax credits are
deducted from the income tax provision.
(f)
I
ncome taxes
Nortel Networks provides for income taxes using the asset and liability method. This approach recognizes the amount of taxes
payable or refundable for the current year as well as deferred tax assets and liabilities for the future tax consequence of events
recognized in the consolidated financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of
changes in tax laws or enacted tax rates.
In establishing the appropriate income tax valuation allowances, Nortel Networks assesses the realizability of its net deferred tax
assets quarterly and based on all available evidence, both positive and negative, determines whether it is more likely than not that
the remaining net deferred tax assets or a portion thereof will be realized.
(
g
)
E
arnin
g
s(loss)
p
er common share
Basic earnings (loss) per common share is calculated by dividing the net earnings (loss) by the weighted-average number of Nortel
Networks Corporation’s common shares outstanding during the period. Diluted earnings (loss) per common share is calculated by
dividing the applicable net earnings (loss) by the sum of the weighted-average number of common shares outstanding and all
additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the
period. The treasury stock method is used to compute the dilutive effect of warrants, options and similar instruments. The if-
converted method is used to compute the dilutive effect of convertible debt. A comparison of the conditions required for issuance of
shares compared to those existing at the end of the period is used to compute the dilutive effect of contingently issuable shares.
(h) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, balances with banks and short-term investments. All highly liquid investments
with original maturities of three months or less are classified as cash and cash equivalents. The fair value of cash and cash
equivalents approximates the amounts shown in the consolidated financial statements.
(i)
R
estricted cash and cash e
q
uivalents
Cash and cash equivalents are considered restricted when they are subject to contingent rights of a third party customer under bid,
performance related and other bonds associated with contracts that Nortel Networks is not able to unilaterally revoke.
(
j
)
P
rovision
f
or doubt
f
ul accounts
The provision for doubtful accounts for trade, notes and long-term receivables due from customers is established based on an
assessment of a customer’s credit quality, as well as subjective factors and trends, including the aging of receivable balances.
Generally, these credit assessments occur prior to the inception of the credit exposure and at regular reviews during the life of the
exposure.
Customer financing receivables include receivables from customers with deferred payment terms. Customer financing receivables
are considered impaired when they are classified as non-performing, payment arrears exceed 90 days or a major credit event such as
a material default has occurred, and management determines that collection of amounts due according to the contractual terms is
doubtful. Provisions for impaired customer financing receivables are recorded based on the expected recovery of defaulted
customer obligations, being the present value of expected cash flows, or the realizable value of the collateral if recovery of the
receivables is dependent upon a liquidation of the assets. Interest income on impaired customer finance receivables is recognized as
the cash payments are collected.
(k)
I
nventories