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recognized under SOP 97-2 and revenue related to the hardware element is recognized under SOP 81-1 or SAB 101.
For accounting units related to customized network solutions and certain network build outs, revenues are recognized under SOP
81-1 using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded
based on a measure of the percentage of costs incurred to date on a contract relative to the estimated total expected contract costs.
Profit estimates on long-term contracts are revised periodically based on changes in circumstances and any losses on contracts are
recognized in the period that such losses become known. Generally, the terms of long-term contracts provide for progress billing
based on completion of certain phases of work. Contract revenues recognized, based on costs incurred towards the completion of
the project, that are unbilled are accumulated in the contracts in progress account included in accounts receivable — net. Billings in
excess of revenues recognized to date on long-term contracts are recorded as advance billings in excess of revenues within other
accrued liabilities.
Revenue for hardware that does not require significant customization, and where any software is considered incidental, is
recognized under SAB 104. Under SAB 104, revenue is recognized provided that persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectibility is reasonably assured. For
hardware, delivery is considered to have occurred upon shipment provided that risk of loss, and title in certain jurisdictions, have
been transferred to the customer.
Engineering, installation and other service revenues are recognized as the services are performed.
Nortel Networks S.A. makes certain sales through multiple distribution channels, primarily resellers and distributors. These
customers are generally given certain rights of return. For products sold through these distribution channels, revenue is recognized
from product sale at the time of shipment to the distribution channel when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable and collection is reasonably assured. Accruals for estimated sales returns and other
allowances are recorded at the time of revenue recognition and are based on contract terms and prior claims experience.
Software revenue is generally recognized under SOP 97-2. For software arrangements involving multiple elements, Nortel
Networks allocates revenue to each element based on the relative fair value or the residual method, as applicable, and using vendor
specific objective evidence of fair values, which is based on prices charged when the element is sold separately. Software revenue
accounted for under SOP 97-2 is recognized when: persuasive evidence of an arrangement exists; the software is delivered in
accordance with all terms and conditions of the customer contracts; the fee is fixed or determinable; and collection is reasonably
assured. Revenue related to post-contract support, including technical support and unspecified when-and-if available software
upgrades (“PCS”), is recognized ratably over the PCS term. Nortel Networks S.A. provides extended payment terms on certain
software contracts and may sell these receivables to third parties. The fees on these contracts are considered fixed or determinable if
the contracts are similar to others for which Nortel Networks S.A. has a standard business practice of providing extended payment
terms and has a history of successfully collecting under the original payment terms without making concessions.
Under SAB 104 or SOP 97-2, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of
(i) the undelivered element is delivered or (ii) fair value of the undelivered element exists, unless the undelivered element is a
service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.
(e)
R
esearch and develo
p
ment
Research and development (“R&D”) costs are charged to net earnings (loss) in the periods in which they are incurred. However,
costs incurred pursuant to specific contracts with third parties for which Nortel Networks S.A. is obligated to deliver a product are
charged to cost of revenues in the same period as the related revenue is recognized. Related global investment tax credits are
deducted from the income tax provision.
(
f
)
I
ncome taxes
Nortel Networks S.A. provides for income taxes using the asset and liability method. This approach recognizes the amount of taxes
payable or refundable for the current year as well as deferred tax assets and liabilities for the future tax consequence of events
recognized in the consolidated financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of
changes in tax laws or enacted tax rates.