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R
esidual
p
ro
f
it sharin
g
Adjustments to cost of revenues of Nortel Networks S.A. are primarily due to adjustments to the results of Nortel Networks resulting
from the restatements. These adjustments impact the cost of revenues of Nortel Networks S.A. through the global profit split
methodology implemented since 2001 (see note 10). The share of Nortel Networks S.A. in the global profit of Nortel Networks was
increased by
49,668 and 60,747 for the years ending December 31, 2002 and December 31, 2001 respectively.
R
elated
p
art
y
revenues and cost o
f
revenues
Adjustments to revenues from related parties of Nortel Networks S.A. are primarily due to errors in the timing of the revenue recognition
from a profit split agreement by which Nortel Networks S.A. is entitled to receive a share of the profit recognized by certain affiliated
parties. An amount of
9,800 of revenue related to this agreement was recognized in the year ended December 31, 2002 whereas Nortel
Networks S.A. determined that this revenue should have been recognized in the year ended December 31, 2001.
The reduction of
9,800 of related party revenues in the year ended December 31, 2002 resulting from this adjustment is partially offset
by another adjustment for an amount of
4,438 that was recorded to correct a reduction in related party revenues recorded in the year
ended December, 31 2002. The reduction of related party revenue recorded in the year ended December 31, 2002 was a correction of
related party revenues recorded in error in the year ended December 31, 2000. The adjustment is reprofiling the reduction of revenues
from related parties to the year ended December 31, 2000. An adjustment was recorded to the cost of revenues to related parties (see
below) on the same transaction for the same amount resulting in an increase to cost of revenues to related parties by
4,438.
The reduction of
4,856 in cost of revenues to related parties in the year ended December 31, 2001 related mainly to the correction of an
amount of
9,900 billed to Nortel Networks S.A. in error under a profit split agreement partially offset by an increase of cost of revenues
to related parties for
4,438 due to the correction of an error recorded in the year ended December, 31 2002 and that was correcting an
error that had taken place in the year ended December 31, 2000. Another adjustment for
365 to cost of revenues to related parties was
recorded to correct certain charges that had not been expensed in error.
R
elated
p
art
y
out o
f
balances
As part of the Second Restatement process, Nortel Networks S.A. undertook a review of the inter-company out-of-balance positions. The
timing of the significant underlying out-of-balance positions has been identified and corrections recorded in the appropriate periods. The
adjustments for the out-of-balance positions resulted in approximately a
61 and a 75 decrease to the previously reported net loss for the
years ended December 31, 2002 and 2001, respectively.
(c) Plant and e
q
ui
p
ment
As a result of the Independent Review, various accounts were examined. Certain known errors that were previously not recorded because
the amount of the errors was not material to the financial statements of Nortel Networks S.A. were also corrected. The following table
summarizes the adjustments relative to plant and equipment.
2002 2001
Net increase (decrease) from other ad
j
ustments to above items
Cost of revenues 483 8
Selling, general and administrative expense (3,280) (2,821)
Research and development expense –(319)
Other income (expense) — net 129 (94)
Interest on long-term debt 3,280 2,821
Net increase (decrease) from other adjustments to above items
612 (405)