Nokia 2006 Annual Report Download - page 154

Notes to the Consolidated Financial Statements (Continued)
1. Accounting principles (Continued)
Earnings per share
The Group calculates both basic and diluted earnings per share in accordance with IAS 33, Earnings
per share, (IAS 33). Under IAS 33, basic earnings per share is computed using the weighted average
number of shares outstanding during the period. Diluted earnings per share is computed using the
weighted average number of shares outstanding during the period plus the dilutive effect of stock
options, restricted shares and performance shares outstanding during the period.
Use of estimates
The preparation of financial statements in conformity with IFRS requires 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.
Set forth below are areas requiring significant judgment and estimation that may have an impact on
reported results and the financial position.
Revenue recognition
Sales from the majority of the Group are recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, collectibility is probable and the
significant risks and rewards of ownership have transferred to the buyer. Current sales may
materially change if management’s assessment of such criteria was determined to be inaccurate.
Revenue 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. Recognized revenues and profits are subject to
revisions during the project in the event that the assumptions regarding the overall project outcome
are revised. Current sales and profit estimates for projects may materially 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
The Group has provided a limited amount of customer financing and agreed extended payment
terms with selected customers. Should the actual financial position of the customers or general
economic conditions differ from assumptions, the ultimate collectibility of such financings and trade
credits may be required to be reassessed, which could result in a writeoff of these balances and
thus negatively impact profits in future periods.
Allowances for doubtful accounts
The Group maintains allowances for doubtful accounts for estimated losses resulting from the
subsequent inability of customers to make required payments. If the financial conditions of
customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required in future periods.
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