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In establishing the appropriate income tax valuation allowances, Nortel Networks S.A. assesses the realizability of its net deferred
tax assets and based on all available evidence, both positive and negative, determines whether it is more likely than not that the
remaining net deferred tax assets or a portion thereof will be realized.
(
g
)Cashandcashe
q
uivalents
Cash and cash equivalents consist of cash on hand, balances with banks and short-term investments. All highly liquid investments
with original maturities of three months or less are classified as cash and cash equivalents. The fair value of cash and cash
equivalents approximates the amounts shown in the consolidated financial statements.
(h)
P
rovision
f
or doubt
f
ul accounts
The provision for doubtful accounts for trade, notes and long-term receivables due from customers is established based on an
assessment of a customer’s credit quality, as well as subjective factors and trends, including the aging of receivable balances.
Generally, these credit assessments occur prior to the inception of the credit exposure and at regular reviews during the life of the
exposure.
(i)
I
nventories
Inventories are valued at the lower of cost (calculated generally on a first-in, first-out basis) or market. The cost of finished goods
and work in process is comprised of material, labor and manufacturing overhead. Provisions for inventory are based on estimates of
future customer demand for products, including general economic conditions, growth prospects within the customer’s ultimate
marketplaces and market acceptance of current and pending products. In addition, full provisions are generally recorded for surplus
inventory in excess of one year’s forecast demand or inventory deemed obsolete.
(
j
)
R
eceivables sales
Transfers of accounts receivable that meet the criteria for surrender of control under FASB Statement of Financial Accounting
Standard (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, are
accounted for as sales. Generally, Nortel Networks S.A. retains servicing rights and, in some cases, provides limited recourse when
it sells receivables. A gain or loss is recorded in other income (expense) — net at the date of the receivables sale and is based upon,
in part, the previous carrying amount of the receivables involved in the transfer allocated between the assets sold and the retained
interests based on their relative fair value at the date of the transfer. Fair value is generally estimated based on the present value of
the estimated future cash flows expected under management’s assumptions, including discount rates assigned commensurate with
risks. Retained interests are classified as available for sale securities.
Nortel Networks S.A., 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. Certain transactions will enable
Nortel Networks S.A., when acting as the servicing agent, to receive a servicing bonus at the maturity of the transaction if certain
performance criteria are met. The ultimate collection of servicing bonuses is based primarily on the collectibility and credit
experience of the receivables sold and is sometimes paid at the discretion of the transferee. Nortel Networks S.A. initially records
the non-discretionary servicing bonus at fair value which is the discounted value of the estimated future cash flows taking into
consideration future estimated interest rates and credit losses. Generally, the discretionary servicing bonus is initially recorded at a
fair value of nil due to the fact that it is paid at the discretion of the transferee and based on the determination that future credit
losses will offset any such servicing bonus. Nortel Networks S.A. reviews the fair value assigned to retained interests, including the
servicing bonus, at each reporting date subsequent to the date of the transfer to determine if there is an other than temporary
impairment. Fair value is reviewed using similar valuation techniques as those used to initially measure the retained interest and, if
a change in events or circumstances warrants, the fair value is adjusted and any other than temporary impairments are recorded in
other income (expense) — net.
(k)
I
nvestments
Investments in equity securities of companies over which Nortel Networks S.A. does not exert significant influence are accounted
for using the cost method. Nortel Networks S.A. monitors its investments for factors indicating other than temporary impairment
and records a charge to net earnings (loss) when appropriate.