Nokia 2004 Annual Report Download - page 58

Networks’ current sales and profit estimates for projects may change due to the early stage of a
long-term project, new technology, changes in the project scope, changes in costs, changes in
timing, changes in customers’ plans, realization of penalties, and other corresponding factors.
Customer financing
We have provided a limited amount of customer financing and agreed extended payment terms
with selected customers in our Networks business. In establishing credit arrangements,
management must assess the creditworthiness of the customer and the timing of cash flows
expected to be received under the arrangement. However, should the actual financial position of
our customers or general economic conditions differ from our assumptions, we may be required
to re-assess the ultimate collectibility of such financings and trade credits, which could result in a
write-off of these balances in future periods and thus negatively impact our profits in future
periods. Our assessment of the net recoverable value considers the collateral and security
arrangements of the receivable as well as the likelihood and timing of estimated collections. See
also Note 35(b) to our consolidated financial statements for a further discussion of long-term
customer loans.
Allowances for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the subsequent
inability of our customers to make required payments. If the financial conditions of our customers
were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required in future periods. Management specifically analyzes accounts
receivables and analyzes historical bad debt, customer concentrations, customer creditworthiness,
current economic trends and changes in our customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts.
Inventory-related allowances
We periodically review our inventory for excess inventory, obsolescence and declines in market
value below cost and record an allowance against the inventory balance for any such declines.
These reviews require management to estimate future demand for our products. Possible changes
in these estimates could result in revisions to the valuation of inventory.
Warranty provisions
We provide for the estimated cost of product warranties at the time revenue is recognized. Nokia’s
products are covered by product warranty plans of varying periods, depending on local practices
and regulations. While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, our warranty
obligations are affected by actual product failure rates (field failure rates) and by material usage
and service delivery costs incurred in correcting a product failure. Our warranty provision is
established based upon our best estimates of the amounts necessary to settle future and existing
claims on products sold as of the balance sheet date. As our new products incorporate complex
technologies, as we continuously introduce new products, and as local laws, regulations and
practices may change, it will be increasingly difficult to anticipate our failure rates, the length of
warranty periods and repair costs. While we believe that our warranty provisions are adequate
and that the judgments applied are appropriate, the ultimate cost of product warranty could differ
materially from our estimates. When the actual cost of quality of our products is lower than we
originally anticipated, we release an appropriate proportion of the provision, and if the cost of
quality is higher than anticipated, we increase the provision.
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