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The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with
its carrying amount, including the goodwill allocated to the reporting unit. Measurement of the fair value of a reporting unit is based
on one or more fair value measures including present value techniques of estimated future cash flows and estimated amounts at
which the unit as a whole could be bought or sold in a current transaction between willing parties. If the carrying amount of the
reporting unit exceeds the fair value, step two requires the fair value of the reporting unit to be allocated to the underlying assets
and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in net earnings (loss).
(o)
I
ntan
g
ible assets
The intangible assets are comprised principally of customer related intangibles which are amortized over their estimated useful lives
of approximately nine years.
(
p
)Warrant
y
costs
As part of the normal sale of product, Nortel Networks S.A. provides its customers with product warranties that extend for periods
generally ranging from one to six years from the date of sale. A liability for the expected cost of warranty-related claims is
established when products are sold. In estimating warranty liability, historical material replacement costs and the associated labor to
correct the product defect are considered. Revisions are made when actual experience differs materially from historical experience.
Known product defects are specifically accrued for as Nortel Networks S.A. becomes aware of such defects.
(
q
)States
p
onsored
p
ension
p
lans
All employees are covered for pension entitlements under state sponsored pension plans, funded by regular contributions that are
reflected in net earnings (loss).
(r) Financial instruments
The financial instruments that may subject Nortel Networks S.A. to concentrations of credit risk are principally comprised of cash
and cash equivalents and trade accounts receivable. The carrying values of monetary assets and liabilities approximate their fair
value. Cash and cash equivalents are, when not held with related parties, for the most part held by three major financial institutions.
Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may generally be
redeemed upon demand. Nortel Networks S.A. customer base is dispersed across the main Western European countries. Nortel
Networks S.A. performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses for sales
in high-risk countries.
(s) Stock-
b
ased com
p
ensation
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure — an
Amendment of FASB Statement No. 123” (“SFAS 148”), which amended the transitional provisions of SFAS No. 123,
“Accounting for Stock-based Compensation” (“SFAS 123”), for companies electing to recognize employee stock-based
compensation using the fair value based method.
Prior to January 1, 2003, Nortel Networks S.A., as permitted under SFAS 123, applied the intrinsic value method under Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in
accounting for its employee stock-based compensation plans.
Effective January 1, 2003, Nortel Networks S.A. elected to expense employee stock-based compensation using the fair value based
method prospectively for all awards granted, modified, or settled on or after January 1, 2003. The fair value at grant date of stock
options is estimated using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight line basis
over the stock option vesting period. The impact of the adoption of the fair value based method for expense recognition of
employee awards resulted in
1,333 (net of tax of nil) of stock option expense during 2003.
Stock-based awards that are settled or may be settled in cash or shares purchased on the open market at the option of employees or
directors are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the
intrinsic value of the award and is recorded in net earnings (loss) over the vesting period of the award. Changes in Nortel Networks
payment obligation subsequent to vesting of the award and prior