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57 and 107 and rescission of FASB interpretation No. 34” (“FIN 45”). FIN 45 defines a guarantee as a contract that contingently
requires a guarantor to pay a guaranteed party as a result of changes in an underlying economic characteristic (such as interest rates
or market value) that is related to an asset, a liability or an equity security of the guaranteed party or a third party’s failure to
perform under a specified agreement. FIN 45 requires that a liability be recognized for the estimated fair value of the guarantee at
its inception. Guarantees issued prior to January 1, 2003 are not subject to the recognition and measurement provisions, but are
subject to expanded disclosure requirements. Nortel Networks has entered into agreements that contain features which meet the
definition of a guarantee under FIN 45. Effective December 31, 2002, Nortel Networks adopted the disclosure requirements of FIN
45. In addition, effective January 1, 2003, Nortel Networks adopted the initial recognition and measurement provisions of FIN 45
which apply on a prospective basis to certain guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did
not have a material impact on the results of operations and financial condition of Nortel Networks (see note 13).
(b) Asset retirement obli
g
ations
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), which applies to
certain obligations associated with the retirement of tangible long-lived assets. SFAS 143 requires that a liability be initially
recognized for the estimated fair value of the obligation when it is incurred. The associated asset retirement cost is capitalized as
part of the carrying amount of the long-lived asset and depreciated over the remaining life of the underlying asset and the associated
liability is accreted to the estimated fair value of the obligation at the settlement date through periodic accretion charges to net
earnings (loss). When the obligation is settled, any difference between the final cost and the recorded amount is recognized as
income or loss on settlement. Effective January 1, 2003, Nortel Networks adopted the initial recognition and measurement
provisions of SFAS 143 and identified certain asset retirement obligations to remediate leased premises and buildings and
equipment situated on leased land. The adoption of SFAS 143 resulted in a decrease to net earnings (loss) of $12 (net of tax of nil)
which has been reported as a cumulative effect of accounting changes — net of tax, an increase in plant and equipment — net of $4
and an asset retirement obligation liability of $16 as of January 1, 2003. The adoption of SFAS 143 did not have a material impact
on depreciation and accretion expense or basic and diluted earnings (loss) per share.
(c) Accountin
g
for costs associated with exit or dis
p
osal activities
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”),
which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 supercedes EITF Issue No. 94-3,
“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)” (“EITF 94-3”). SFAS 146 requires recognition of costs associated with an exit or disposal activity
when the liability is incurred, whereas under EITF 94-3, a liability for an exit cost was recognized when an entity committed to an
exit plan. In addition, SFAS 146 establishes that fair value is the objective for initial measurement of the liability. The effect of
SFAS 146 was to change the timing of recognition and the basis for measuring certain liabilities and therefore created valuation
differences between SFAS 146 and EITF 94-3. Exit and disposal activities initiated before December 31, 2002 continue to be
accounted for under EITF 94-3. Nortel Networks adopted the requirements of SFAS 146 effective January 1, 2003. The adoption of
SFAS 146 did not have a material impact on Nortel Networks results of operations and financial condition.
(d) Consolidation of variable interest entities
In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities — an interpretation of Accounting Research
Bulletin No. 51, ‘Consolidated Financial Statements’” (“FIN 46”). FIN 46 clarifies the application of consolidation guidance to
those entities defined as VIEs (which includes, but is not limited to, special purpose entities, trusts, partnerships, certain joint
ventures and other legal structures) in which equity investors do not have the characteristics of a “controlling financial interest” or
there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46
applied immediately to all VIEs created after January 31, 2003 and by the beginning of the first interim or annual reporting period
commencing after June 15, 2003 for VIEs created prior to February 1, 2003. In October 2003, the FASB issued FSP FIN 46-6,
“Effective Date of FASB Interpretation No. 46”, deferring the effective date for applying the provisions of FIN 46 for VIEs created
prior to February 1, 2003 to the end of the first interim or annual period ending after December 15, 2003. While the criteria for
deferral were met, Nortel Networks elected early application of FIN 46.