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F-59
The following table provides the carrying amounts and fair values for financial assets and liabilities for which fair value differed from the
carrying amount and fair values recorded for derivative financial instruments in accordance with SFAS 133 as of December 31:
2003 2002
Carrying Fair Carrying Fair
amount valu
e
amount valu
e
Financial liabilities:
Lon
g
-term debt due within one
y
ea
r
$ 119 $ 119 $ 243 $ 234
Long-term debt $ 3,891 $ 3,812 $ 3,960 $ 2,413
Derivative financial instruments net asset (liability) position:
Interest rate swap contracts
(a)
$ 61 $ 61 $ 80 $ 80
Forward and option contracts
(b)
$19$19$(28)$(28)
Cross currency coupon swap contracts
(a )
$ – $ – $ 1 $ 1
(a) Recorded in other assets.
(b) Comprised of other assets of $34 and other liabilities of $15 as of December 31, 2003, and other assets of $10 and other liabilities of $38 as of December 31, 2002.
Credit risk
Credit risk on financial instruments arises from the potential for counterparties to default on their contractual obligations to Nortel
Networks. Nortel Networks is exposed to credit risk in the event of non-performance, but does not anticipate non-performance by any of
the counterparties. Nortel Networks limits its credit risk by dealing with counterparties that are considered to be of high credit quality.
The maximum potential loss on all financial instruments may exceed amounts recognized in the consolidated financial statements.
However, Nortel Networks maximum exposure to credit loss in the event of non-performance by the other party to the derivative
contracts is limited to those derivatives that had a positive fair value of $95 as of December 31, 2003. Nortel Networks is also exposed to
credit risk from customers. However, Nortel Networks global orientation has resulted in a large number of diverse customers which
minimizes concentrations of credit risk.
Other derivatives
Nortel Networks may invest in warrants to purchase securities of other companies as a strategic investment or receive warrants in various
transactions. Warrants that relate to publicly traded companies or that can be net share settled are deemed derivative financial instruments
under SFAS 133. Such warrants are generally not eligible to be designated as hedging instruments as there is no corresponding
underlying exposure. In addition, Nortel Networks may enter into certain commercial contracts containing derivative financial
instruments.
Receivables sales
In 2003, 2002 and 2001, Nortel Networks entered into various agreements to sell certain of its receivables. These receivables were sold at
a discount of $20, $25 and $36 from book value for the years ended December 31, 2003, 2002 and 2001, respectively, at annualized
discount rates of approximately 2 percent to 6 percent, 3 percent to 5 percent and 5 percent to 8 percent for the years ended December 31,
2003, 2002 and 2001, respectively. Certain receivables have been sold with limited recourse, not exceeding 10 percent, of $7, $9 and $7
as of December 31, 2003, 2002 and 2001, respectively.
Under certain agreements, Nortel Networks has continued as servicing agent and/or has provided limited recourse. The fair value of these
retained interests is based on the market value of servicing the receivables, historical payment patterns and appropriate discount rates as
applicable. Generally, trade receivables that are sold do not experience prepayments. Nortel Networks, when acting as the servicing
agent, generally does not record an asset or liability related to servicing as the annual servicing fees are equivalent to those that would be
paid to a third party servicing agent. Also, Nortel Networks has not historically experienced significant credit losses with respect to
receivables sold with limited recourse and, as such, no liability was recognized.