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Historically, we had certain intercompany balances that did not eliminate upon consolidation, or out-of-balance positions, and had recorded
provisions accordingly. As part of the Second Restatement, we reviewed these provisions and determined that they should not have been
recorded. We recorded adjustments in the appropriate periods to reverse these provisions and to correct the significant out-of-balance positions.
The net impact of these adjustments was an increase of $6, $14 and $3 to pre-tax loss for the first, second, and third quarters of 2003,
respectively.
As part of the Second Restatement, we reviewed the components of special charges and recorded an increase to special charges of $28, a
decrease of $20 and an increase of $10 for the first, second and third quarters of 2003, respectively. We determined that certain items were
either recorded in special charges in error or, although correctly recorded when originally recognized, were not adjusted in the appropriate
subsequent periods for changes in estimates and/or assumptions. These items related to contract settlement costs, plant and equipment
impairment costs, and severance and fringe benefit related costs.
We recorded other adjustments primarily to correct certain accruals, provisions and other transactions, which were either initially recorded
incorrectly in prior periods, or not properly released or adjusted for changes in estimates and/or assumptions in the appropriate subsequent
periods. The impact of these adjustments was an increase of $7, $94 and $10 to the pre-tax loss for the first, second, and third quarters of 2003,
respectively, primarily due to increased cost of revenues for customer and contract related accruals, warranty costs, and other accruals.
As a result of the restatement process, various presentation inconsistencies were identified. Adjustments were made to appropriately reflect
certain items in the statement of operations. The reclassifications were made for royalty expense, gain (loss) on sale of businesses and assets,
and other items including certain functional spending and specific expenses.
As a result of the restatement process, the initial provision for loss on disposal of the access solutions discontinued operations recorded in
June 2001, and the subsequent activity during 2001 through 2004 were re-examined. We concluded that the net loss on disposal of operations
recognized in the second quarter of 2001 was overstated by $738, of which $520 comprised items that should have been charged to continuing
operations. In addition, other adjustments were necessary to correct certain items that were either initially recorded incorrectly, or not properly
released or adjusted for changes in estimates in the appropriate periods subsequent to the second quarter of 2001. The net impact of all of these
changes on net earnings from discontinued operations — net of tax was a decrease of $68, $7 and $12 for the first, second, and third quarters of
2003, respectively. This was primarily due to the elimination of a gain in the first quarter of 2003 of $90 on redemption of an investment
interest due to the reversal in an earlier period of a full valuation allowance that had been recorded against the investment interest when
acquired.
As described above and in the “Controls and Procedures” section of this report, two material weaknesses in our internal control over financial
reporting were identified at the time of the First Restatement. Over the course of the Second Restatement, we and D&T identified a number of
additional material weaknesses in our internal control over financial reporting, as further described in the “Controls and Procedures” section of
this report. D&T confirmed to the Audit Committee these material weaknesses, listed below, on January 10, 2005:
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Material weaknesses in internal control over financial re
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identified in Second Restatement
• lack of compliance with written Nortel Networks procedures for monitoring and adjusting balances related to certain accruals and
provisions, including restructuring charges and contract and customer accruals;
• lack of compliance with Nortel Networks procedures for appropriately applying applicable GAAP to the initial recording of certain
liabilities including those described in SFAS No. 5, “Accounting for Contingencies”, or SFAS No. 5, and to foreign currency
translation as described in SFAS No. 52;