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F-10
Inventories are valued at the lower of cost (calculated generally on a first-in, first-out basis) or market. The cost of finished goods
and work in process is comprised of material, labor and manufacturing overhead. Provisions for inventory are based on estimates of
future customer demand for products, including general economic conditions, growth prospects within the customer’s ultimate
marketplaces and market acceptance of current and pending products. In addition, full provisions are generally recorded for surplus
inventory in excess of one year’s forecast demand or inventory deemed obsolete.
(l)
R
eceivables sales
Transfers of accounts receivable that meet the criteria for surrender of control under FASB Statement of Financial Accounting
Standard (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, are
accounted for as sales. Generally, Nortel Networks retains servicing rights and, in some cases, provides limited recourse when it
sells receivables. A gain or loss is recorded in other income (expense) — net at the date of the receivables sale and is based upon, in
part, the previous carrying amount of the receivables involved in the transfer allocated between the assets sold and the retained
interests based on their relative fair value at the date of the transfer. Fair value is generally estimated based on the present value of
the estimated future cash flows expected under management’s assumptions, including discount rates assigned commensurate with
risks. Retained interests are classified as available-for-sale securities.
Nortel Networks, when acting as the servicing agent, generally does not record an asset or liability related to servicing as the annual
servicing fees are equivalent to those that would be paid to a third party servicing agent. Certain transactions will enable Nortel
Networks, when acting as the servicing agent, to receive a servicing bonus at the maturity of the transaction if certain performance
criteria are met. The ultimate collection of servicing bonuses is based primarily on the collectibility and credit experience of the
receivables sold and is sometimes paid at the discretion of the transferee. Nortel Networks initially records the non-discretionary
servicing bonus at fair value which is the discounted value of the estimated future cash flows taking into consideration future
estimated interest rates and credit losses. Generally, the discretionary servicing bonus is initially recorded at a fair value of nil due
to the fact that it is paid at the discretion of the transferee and based on the determination that future credit losses will offset any
such servicing bonus.
Nortel Networks reviews the fair value assigned to retained interests, including the servicing bonus, at each reporting date
subsequent to the date of the transfer to determine if there is an other than temporary impairment. Fair value is reviewed using
similar valuation techniques as those used to initially measure the retained interest and, if a change in events or circumstances
warrants, the fair value is adjusted and any other than temporary impairments are recorded in other income (expense)
—
net.
(m)
I
nvestments
Investments in publicly traded equity securities of companies over which Nortel Networks does not exert significant influence are
accounted for at fair value and are classified as available for sale. Unrealized holding gains and losses related to these securities are
excluded from net earnings (loss) and are included in OCI until such gains or losses are realized.
Investments in equity securities of private companies over which Nortel Networks does not exert significant influence are
accounted for using the cost method. Investments in associated companies and joint ventures are accounted for using the equity
method. An impairment loss is recorded when there has been a loss in value of the investment that is other than temporary.
Nortel Networks monitors its investments for factors indicating other than temporary impairment and records a charge to net
earnings (loss) when appropriate.
(n)
P
lant and e
q
ui
p
ment
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is generally calculated on a straight-line basis
over the expected useful lives of the plant and equipment. The expected useful lives of buildings are twenty to forty years, and of
machinery and equipment are five to ten years.
(o)
I
m
p
airment or dis
p
osal o
f
lon
g
-lived assets (
p
lant and e
q
ui
p
ment and ac
q
uired technolo
gy
)