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F-23
continued to be deferred up to the amount of the maximum potential liquidated damages until either the earlier of when the damages were
incurred, or there was no longer the possibility of incurring any damages. As originally recorded, cost provisions were recorded for the
amount of the estimated damages and/or cost of product replacement. To correct these items, related cost provisions were reversed and
revenues and associated cost of revenues were recognized in the appropriate periods.
Fixed or determinable fees
Revenues were recognized on certain sales for which it was subsequently determined that the criteria for revenue recognition under SOP
97-2 had not been met, including arrangements in which the criteria for fixed or determinable fees was not met. Revenues and related
cost of revenues for these agreements were deferred to later periods when payments became due and all criteria for revenue recognition
hadbeenmet.
R
eseller transactions
Prior to 2001, revenues were recognized upon product delivery to a certain reseller who lacked economic substance apart from Nortel
Networks. Revenue should have been deferred and only recognized by Nortel Networks upon sale by the reseller to an end customer.
Correction of this resulted in revenues and cost of revenues being deferred with ultimate recognition in 2001.
Other revenue recognition adjustments
Other adjustments included corrections related to an overstatement of revenues and cost of revenues related to a specific contract in the
Caribbean and Latin American (“CALA”) region, two specific transactions recorded in the first quarter of 2003 which should have been
recorded in 2002, a specific contract with a reciprocal arrangement that should have been treated as a reduction of revenues and therefore
the revenues recorded in 2001 have been reversed, errors in the application of percentage-of-completion accounting for certain contracts,
other errors related to non-cash incentives and concessions provided to customers and other calculation errors.
Foreign exchange
As part of the plan to address a material weakness reported in Nortel Networks Quarterly Report on Form 10-Q for the period ended
September 30, 2003, a review of foreign exchange accounting was undertaken. The net impact was an increase to pre-tax loss of $63 and
$132 for the years ended December 31, 2002 and 2001, respectively. The following presents the impact of these restatement adjustments
on the consolidated statements of operations for the years ended December 31, which are described below:
P
resentation errors
2002 2001
Gross profit
Presentation errors $42$31
Other errors 6 –
Total increase to gross profit $48 $31
Operating expenses
Presentation errors $(1)$(31)
Total decrease to operating expenses $ (1) $ (31)
Other expense
Functional currency designation $ 87 $ 133
Intercompany transaction designation (43) 14
Presentation errors 43 62
Other errors 25 (15)
Total increase to other expense $ 112 $ 194
Total increase to pre-tax loss $63 $132