Nokia 2004 Annual Report Download - page 57

Certain of Nokia’s accounting policies require the application of judgment by management in
selecting appropriate assumptions for calculating financial estimates, which inherently contain
some degree of uncertainty. Management bases its estimates on historical experience and various
other assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the reported carrying values of assets and
liabilities and the reported amounts of revenues and expenses that may not be readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
Nokia believes the following are the critical accounting policies and related judgments and
estimates used in the preparation of its consolidated financial statements. We have discussed the
application of these critical accounting estimates with our Board of Directors and Audit Committee.
Revenue recognition
Revenue from the majority of the Group is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and determinable and collectibility is
probable. The remainder of revenue is recorded under the percentage of completion method.
For Mobile Phones, Multimedia and Enterprise Solutions, as well as certain of Networks’ revenue is
recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed and determinable and collectibility is probable. This requires us to assess at the point of
delivery whether these criteria have been met. When management determines that such criteria
have been met, revenue is recognized. Nokia records estimated reductions to revenue for customer
programs and incentive offerings, including special pricing agreements, price protection and other
volume based discounts at the time of sale, mainly in the mobile device business. Sales
adjustments for volume based discount programs are estimated based largely on historical activity
under similar programs. Price protection adjustments are based on estimates of future price
reductions and certain agreed customer inventories at the date of the price adjustment. An
immaterial part of the revenue from products sold through distribution channels is recognized
when the reseller or distributor sells the product to the end user.
Networks’ revenue from contracts involving solutions achieved through modification of
telecommunications equipment is recognized on the percentage of completion basis when the
outcome of the contract can be estimated reliably. A contract’s outcome can be estimated reliably
when total contract revenue can be estimated reliably, it is probable that economic benefits
associated with the contract will flow to the company, and the stage of contract completion can be
measured reliably. When we are not able to meet those conditions, the policy is to recognize
revenues only equal to costs incurred to date, to the extent that such costs are expected to be
recovered. Completion is measured by reference to costs incurred to date as a percentage of
estimated total project costs.
The percentage of completion method relies on estimates of total expected contract revenue and
costs, as well as the dependable measurement of the progress made towards completing the
particular project. Recognized revenues and profit are subject to revisions during the project in the
event that the assumptions regarding the overall project outcome are revised. The cumulative
impact of a revision in estimates is recorded in the period such revisions become likely and
estimable. Losses on projects in progress are recognized in the period they become likely and
estimable.
Revenue recognition on initial 3G network contracts started in 2002 when Networks achieved 3G
functionality for its single-mode and dual-mode WCDMA 3G systems. Until the time the 3GPP
specifications required by our customers were met, we deferred the application of the cost-to-cost
input model. Upon achieving 3G functionality for WCDMA network projects, we began recognizing
revenue under the cost-to-cost input method of percentage of completion accounting and have
continued to apply the method in 2003 and 2004.
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