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ecent accountin
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ronouncements
(i) On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MPDIM Act”) was
signed into law in the U.S. The MPDIM Act introduced a prescription drug benefit under Medicare (specifically, Medicare Part
D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. As permitted by FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 106-1,
“Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003”, Nortel Networks chose to make the one-time deferral election which remained in effect for its plans in the U.S. until the
earlier of the issuance of specific authoritative guidance by the FASB on how to account for the federal subsidy to be provided
to plan sponsors under the MPDIM Act, or the remeasurement of plan assets and obligations subsequent to January 31, 2004.
Therefore, Nortel Networks post-retirement benefit obligation as of December 31, 2003 and net post-retirement benefit cost for
the year ended December 31, 2003 did not reflect the effects of the MPDIM Act on the plans. On May 19, 2004, FSP FAS 106-
2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003” (“FSP FAS 106-2”) was issued by the FASB to provide guidance relating to the prescription drug subsidy provided by
the MPDIM Act. Nortel Networks expects to have portions of its post-retirement benefit plans qualify as actuarially equivalent
to the benefit provided under the MPDIM Act, for which it expects to receive federal subsidies. Nortel Networks expects that
other portions of the plans will not be actuarially equivalent. The financial impact of the federal subsidies was determined by
remeasuring Nortel Networks retiree life and medical obligation as of January 1, 2004, as provided under the retroactive
application provision of FSP FAS 106-2. The effective date of FSP FAS 106-2 is the first annual or interim period beginning
after June 15, 2004, with earlier adoption encouraged. Nortel Networks adopted FSP FAS 106-2 for the three-month period
ended June 30, 2004. As a result of adoption, the accrued post-retirement benefit obligation decreased by $31. Net periodic
post-retirement benefit costs are expected to decrease by $2 for 2004, as a result of the subsidy.
(ii) In March 2004, the EITF reached consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides guidance on determining when an investment is
considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. EITF 03-1
is applicable to marketable debt and equity securities within the scope of SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS 115”), and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit
Organizations”, and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity
method of accounting. In September 2004, the FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments””, which
delays the effective date for the measurement and recognition criteria contained in EITF 03-1 until final application guidance is
issued. The delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing
authoritative literature. The adoption of EITF 03-1 is not expected to have a material impact on Nortel Networks results of
operations and financial position.
(iii) On September 30, 2004, the EITF reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on
Diluted Earnings Per Share” (“EITF 04-8”), which addresses when the dilutive effect of contingently convertible debt
instruments should be included in diluted earnings (loss) per share. EITF 04-8 requires that contingently convertible debt
instruments be included in the computation of diluted earnings (loss) per share regardless of whether the market price trigger
has been met. EITF 04-8 also requires that prior period diluted earnings (loss) per share amounts presented for comparative
purposes be restated. EITF 04-8 is effective for reporting periods ending after December 15, 2004. The adoption of EITF 04-8
is not expected to have an impact on Nortel Networks diluted earnings (loss) per share.
Com
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arative fi
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Certain 2002 and 2001 figures in the consolidated financial statements have been reclassified to conform to the 2003 presentation and
have been restated as set out in note 3.