Nokia 2005 Annual Report Download - page 56

Critical Accounting Policies
Our accounting policies affecting our financial condition and results of operations are more fully
described in Note 1 to our consolidated financial statements included in Item 18 of this annual
report on Form 20-F. 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 or determinable and collectibility is
probable. The remainder of revenue is recorded under the percentage of completion method.
Mobile Phones, Multimedia and Enterprise Solutions, and certain Networks’ revenue is recognized
when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
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 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 and cost of sales from contracts involving solutions achieved through
modification of complex telecommunications equipment is recognized on the percentage of
completion basis when the outcome of the contract can be estimated reliably. This occurs when
total contract revenue and the cost to complete the contract can be estimated reliably, it is
probable that economic benefits associated with the contract will flow to the Group, and the stage
of contract completion can be measured. 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 cost-to-cost method.
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.
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