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F-12
of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of
goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in net earnings (loss).
(q)
I
ntangible assets
Acquired technology represents the value of the proprietary know-how which was technologically feasible as of the acquisition
date, and is charged to net earnings (loss) on a straight-line basis over its estimated useful life of two to three years. Other intangible
assets are amortized into net earnings (loss) based on their expected pattern of benefit to future periods using estimates of
undiscounted cash flows.
IPR&D represents the value, on closing of a business combination, of acquired research and development which was not
technologically feasible as of the acquisition date and, other than its intended use, had no alternative future use. Independent
valuations are performed to assess and allocate a value to IPR&D. The value allocated to IPR&D represents the estimated fair value
based on risk-adjusted future cash flows generated from the products that would result from each of the in-process projects.
Estimated future after tax cash flows of each project, on a product by product basis, are based on Nortel Networks estimates of
revenues less operating expenses, cash flow adjustments, income taxes and charges for the use of contributory assets. Future cash
flows are also adjusted for the value contributed by any core technology and development efforts that would be completed post-
acquisition. IPR&D is charged to net earnings (loss) as of the date of acquisition.
(r) Warrant
y
costs
As part of the normal sale of product, Nortel Networks provides its customers with product warranties that extend for periods
generally ranging from one to six years from the date of sale. A liability for the expected cost of warranty-related claims is
established when products are sold. In estimating warranty liability, historical material replacement costs and the associated labor to
correct the product defect are considered. Revisions are made when actual experience differs materially from historical experience.
Known product defects are specifically accrued for as Nortel Networks becomes aware of such defects.
(s)
P
ension,
p
ost-
r
etirement and
p
ost-em
p
lo
y
ment bene
f
its
Pension expense, based on management’s assumptions, consists of the: actuarially computed costs of pension benefits in respect of
the current year’s service; imputed returns on plan assets and imputed interest on pension obligations; and straight-line amortization
under the corridor approach of experience gains and losses, assumption changes and plan amendments over the expected average
remaining service life of the employee group.
The expected costs of post-retirement and certain post-employment benefits, other than pensions, for active employees are accrued
in the consolidated financial statements during the years employees provide service to Nortel Networks. These costs are recorded
based on actuarial methods and assumptions. Other post-employment benefits are recognized when the event triggering the
obligation occurs.
(t)
D
erivative
f
inancial instruments