Nokia 2006 Annual Report Download - page 58

Capitalized development costs
We capitalize certain development costs when it is probable that a development project will be a
success and certain criteria, including commercial and technical feasibility, have been met. These
costs are then amortized on a systematic basis over their expected useful lives, which due to the
constant development of new technologies is between two to five years. During the development
stage, management must estimate the commercial and technical feasibility of these projects as well
as their expected useful lives. Should a product fail to substantiate its estimated feasibility or life
cycle, we may be required to write off excess development costs in future periods.
Whenever there is an indicator that development costs capitalized for a specific project may be
impaired, the recoverable amount of the asset is estimated. An asset is impaired when the carrying
amount of the asset exceeds its recoverable amount. The recoverable amount is defined as the
higher of an asset’s net selling price and value in use. Value in use is the present value of
discounted estimated future cash flows expected to arise from the continuing use of an asset and
from its disposal at the end of its useful life. For projects still in development, these estimates
include the future cash outflows that are expected to occur before the asset is ready for use. See
Note 8 to our consolidated financial statements.
Impairment reviews are based upon our projections of anticipated future cash flows. The most
significant variables in determining cash flows are discount rates, terminal values, the number of
years on which to base the cash flow projections, as well as the assumptions and estimates used to
determine the cash inflows and outflows. Management determines discount rates to be used based
on the risk inherent in the related activity’s current business model and industry comparisons.
Terminal values are based on the expected life of products and forecasted life cycle and forecasted
cash flows over that period. While we believe that our assumptions are appropriate, such amounts
estimated could differ materially from what will actually occur in the future. For IFRS, discounted
estimated cash flows are used to identify the existence of an impairment while for US GAAP
undiscounted future cash flows are used. Consequently, an impairment could be required under IFRS
but not under US GAAP.
Valuation of longlived and intangible assets and goodwill
We assess the carrying value of identifiable intangible assets, longlived assets and goodwill
annually, or more frequently if events or changes in circumstances indicate that such carrying value
may not be recoverable. Factors we consider important, which could trigger an impairment review,
include the following:
)significant underperformance relative to historical or projected future results;
)significant changes in the manner of our use of the acquired assets or the strategy for our
overall business; and
)significantly negative industry or economic trends.
When we determine that the carrying value of intangible assets, longlived assets or goodwill may
not be recoverable based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on discounted projected cash flows.
This review is based upon our projections of anticipated future cash flows. The most significant
variables in determining cash flows are discount rates, terminal values, the number of years on
which to base the cash flow projections, as well as the assumptions and estimates used to
determine the cash inflows and outflows. Management determines discount rates to be used based
on the risk inherent in the related activity’s current business model and industry comparisons.
Terminal values are based on the expected life of products and forecasted life cycle and forecasted
cash flows over that period. While we believe that our assumptions are appropriate, such amounts
estimated could differ materially from what will actually occur in the future. In assessing goodwill,
for IFRS these discounted cash flows are prepared at a cash generating unit level, and for US GAAP
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