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as security for these types of bonds. See “Available support facility” for additional information on the EDC Support Facility and the security
agreements and see “Developments in 2003 and 2004 — Nortel Networks Audit Committee Independent Review; restatements; related matters
— EDC Support Facility” for additional information in connection with amendments to the EDC Support Facility and developments in
connection with the EDC Support Facility and related security agreements subsequent to December 31, 2003.
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eceivables securitization and certain lease financing transactions
In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN, No. 46, “Consolidation of Variable
Interest Entities — an Interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, or FIN 46, and in
December 2003, the FASB issued a revision of FIN 46 — FIN 46 (Revised 2003), or FIN 46R. FIN 46R provides guidance with respect to the
consolidation of variable interest entities, or VIEs. VIEs are characterized as entities in which equity investors do not have a “controlling
financial interest” or there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.
Reporting entities which have a variable interest in such an entity and are deemed to be the primary beneficiary must consolidate the variable
interest entity.
As of December 31, 2003, our participation in a lease financing transaction was structured through a single transaction variable interest entity
which did not have sufficient equity at risk as defined in FIN 46R and is no longer considered an off-balance sheet arrangement effective
July 1, 2003. We retained certain risks associated with guaranteeing recovery of the unamortized principal balance of the special purpose
entity’s debt which represented the majority of the risks associated with the variable interest entity’s activities. For additional information, see
“Consolidation of variable interest entities” in note 4(d) of the accompanying consolidated financial statements.
We have also conducted certain receivable sales transactions either directly with financial institutions or with multi-seller conduits. Under
some of these agreements, we have continued as servicing agent and/or have provided limited recourse. The fair value of these retained
interests is based on the market value of servicing the receivables, historical payment patterns, expected future cash flows and appropriate
discount rates as applicable. Where we have acted as the servicing agent, we generally have not recorded an asset or liability related to
servicing as the annual servicing fees were equivalent to those that would have been paid to a third party servicing agent. Also, we have not
historically experienced significant credit losses with respect to receivables sold with limited recourse. As of December 31, 2003, we were not
required to, and did not, consolidate or provide any of the additional disclosures set out in FIN 46R with respect to the variable interest entities
involving receivable sales because we were not considered the primary beneficiary.
Additionally, we have agreed to indemnify our counterparties in receivables securitization transactions. The indemnifications provided to
counterparties in these types of transactions may require us to compensate counterparties for costs incurred as a result of changes in laws and
regulations (including tax legislation) or in the interpretations of such laws and regulations, or as a result of regulatory penalties that may be
suffered by the counterparty as a consequence of the transaction. Certain receivables securitization transactions include indemnifications
requiring the repurchase of the receivables if the particular transaction becomes invalid. As of December 31, 2003, we had approximately $327
of securitized receivables which were subject to repurchase under this provision, in which case we would assume all rights to collect such
receivables. The indemnification provisions generally expire upon expiration of the securitization agreements, which extend through 2005, or
collection of the receivable amount by the counterparty. We are generally unable to estimate the maximum potential liability for all of these
types of indemnification guarantees as certain agreements do not specify a maximum amount and the amounts are dependent upon the outcome
of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, we have not made any
significant indemnification payments or receivable repurchases under these agreements and no significant liability has been accrued in the
accompanying consolidated financial statements with respect to the obligation associated with these guarantees.
Other indemnifications or guarantees
Through our normal course of business, we have also entered into other indemnifications or guarantees that arise in various types of
arrangements including:
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• business sale and business combination agreements;
• intellectual property indemnification obligations;