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F-32
Effective July 1, 2003, Nortel Networks prospectively began consolidating two VIEs for which Nortel Networks was considered the
primary beneficiary following the guidance of FIN 46, on the basis that Nortel Networks retained certain risks associated with
guaranteeing recovery of the unamortized principal balance of the VIEs’ debt, in two lease financing transactions, which
represented the majority of the risks associated with the respective VIEs’ activities. The amount of the guarantees will be adjusted
over time as the underlying debt matures. As of December 31, 2003, Nortel Networks consolidated balance sheet included $184 of
long-term debt (see note 11) and $183 of plant and equipment — net (see note 5) related to these VIEs. These amounts represented
both the collateral and maximum exposure to loss as a result of Nortel Networks involvement with these VIEs.
In December 2003, the FASB issued FIN 46R which amends and supercedes the original FIN 46. Effective December 2003, Nortel
Networks adopted FIN 46R. Any impacts of applying FIN 46R to an entity to which FIN 46 had previously been applied are
considered immaterial to Nortel Networks results of operations and financial condition and Nortel Networks accounting treatment
of VIEs.
Nortel Networks has conducted certain receivable sales with multi-seller conduits. As well, Nortel Networks has other financial
interests and contractual arrangements which would meet the definition of a variable interest under FIN 46R, including investments
in associated companies and joint ventures, customer financing arrangements, guarantees and indemnification arrangements, certain
leasing arrangements and certain compensation arrangements. As of December 31, 2003, none of these interests or arrangements
met the requirements for consolidation under FIN 46R.
(e) Accountin
g
for certain financial instruments with characteristics of both liabilities and e
q
uit
y
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity” (“SFAS 150”). SFAS 150 clarifies the accounting for certain financial instruments with characteristics of
both liabilities and equity, including mandatorily redeemable non-controlling interests, and requires that those instruments be
classified as liabilities on the balance sheets. Previously, many of those financial instruments were classified as equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. In November 2003, the FASB issued FSP FAS 150-3, “Effective Date,
Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Non-controlling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity” (“FSP FAS 150-3”), which deferred indefinitely the effective date for applying
the specific provisions within SFAS 150 related to the classification and measurement of mandatorily redeemable non-controlling
interests.
As of December 31, 2003, Nortel Networks continued to consolidate two enterprises with limited lives. Upon liquidation in 2024,
the net assets of these entities will be distributed to the owners based on their relative interests at that time. The minority interest
included in the consolidated balance sheet related to these entities as of December 31, 2003 was $45. Nortel Networks has not yet
determined the fair value of this minority interest as of December 31, 2003. The adoption of SFAS 150, as amended by FSP FAS
150-3, did not have a material impact on Nortel Networks results of operations and financial condition.
(f) Accountin
g
for revenue arran
g
ements with multi
p
le deliverables
In November 2002, the EITF reached a consensus on EITF 00-21. In the absence of higher level accounting literature, EITF 00-21
governs how to separate and allocate revenue to goods or services or both that are to be delivered in a bundled sales arrangement.
EITF 00-21 applies to revenue arrangements entered into after June 30, 2003 and allows for either prospective application or
cumulative adjustment upon adoption. Nortel Networks adopted the requirements of EITF 00-21 on a prospective basis effective
July 1, 2003. On October 1, 2003, Nortel Networks has also adopted related interpretive guidance contained in EITF 03-5,
“Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-
Incidental Software” (“EITF 03-5”), which addresses whether non-software deliverables included in an arrangement that contains
software that is more than incidental to the products or services as a whole are included within the scope of SOP 97-2. The adoption
of EITF 00-21 and EITF 03-5 did not have a material impact on Nortel Networks results of operations and financial condition.