Nokia 2005 Annual Report Download - page 60

Fair value of derivatives and other financial instruments
The fair value of financial instruments that are not traded in an active market (for example,
unlisted equities, currency options and embedded derivatives) are determined using valuation
techniques. We use judgment to select an appropriate valuation methodology and underlying
assumptions based principally on existing market conditions. Changes in these assumptions may
cause the Group to recognize impairments or losses in the future periods.
Deferred taxes
Management judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities and the extent to which deferred tax assets can be recognized. We recognize
deferred tax assets if it is probable that sufficient taxable income will be available in the future
against which the temporary differences and unused tax losses can be utilized. We have
considered future taxable income and tax planning strategies in assessing whether deferred tax
assets should be recognized. If the final outcome of these matters differs from the amounts
initially recorded, differences will impact the income tax and deferred tax provisions in the period
in which such determination is made.
Pensions
The determination of our pension benefit obligation and expense for defined benefit pension plans
is dependent on our selection of certain assumptions used by actuaries in calculating such
amounts. Those assumptions are described in Note 6 to our consolidated financial statements and
include, among others, the discount rate, expected long-term rate of return on plan assets and
annual rate of increase in future compensation levels. A portion of our plan assets is invested in
equity securities. The equity markets have experienced volatility, which has affected the value of
our pension plan assets. This volatility may make it difficult to estimate the long-term rate of
return on plan assets. Actual results that differ from our assumptions are accumulated and
amortized over future periods and therefore generally affect our recognized expense and recorded
obligation in such future periods. Our assumptions are based on actual historical experience and
external data regarding compensation and discount rate trends. While we believe that our
assumptions are appropriate, significant differences in our actual experience or significant changes
in our assumptions may materially affect our pension obligation and our future expense.
Share-based compensation
We have various types of equity settled share based compensation schemes for employees.
Employee services received, and the corresponding increase in equity, are measured by reference
to the fair value of the equity instruments as at the date of grant, excluding the impact of any
non-market vesting conditions. Fair value of stock options is estimated by using the Black Scholes
model on the date of grant based on certain assumptions. Those assumptions are described in
Note 24 to the consolidated financial statements and include, among others, the dividend yield,
expected volatility and expected life of the options. The expected life of options is estimated by
observing general option holder behavior and actual historical terms of Nokia stock option
programs, whereas the assumption of the expected volatility has been set by reference to the
implied volatility of options available on Nokia shares in the open market and in light of historical
patterns of volatility. These variables make estimation of fair value of stock options difficult.
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