Nokia 2009 Annual Report Download - page 86

Inventoryrelated Allowances
We periodically review our inventory for excess, 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 in future periods. Based on these estimates and
assumptions the allowance for excess and obsolete inventory was EUR 361 million in 2009
(EUR 348 million in 2008). The financial impact of the assumptions regarding this allowance affects
mainly the cost of sales of the Devices & Services and Nokia Siemens Networks segments.
Warranty Provisions
We provide for the estimated cost of product warranties at the time revenue is recognized. Our
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 we continuously introduce new products which incorporate complex
technology, 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. Based on
these estimates and assumptions the warranty provision decreased to EUR 971 million primarily due
to lower sales volumes in Devices & Services in 2009 (EUR 1 375 million in 2008). The financial impact
of the assumptions regarding this provision mainly affects the cost of sales of Devices & Services
segment.
Provision for Intellectual Property Rights, or IPR, Infringements
We provide for the estimated future settlements related to asserted and unasserted past alleged IPR
infringements based on the probable outcome of each potential infringement.
Our products and solutions include increasingly complex technologies involving numerous patented
and other proprietary technologies. Although we proactively try to ensure that we are aware of any
patents and other intellectual property rights related to our products and solutions under
development and thereby avoid inadvertent infringement of proprietary technologies, the nature of
our business is such that patent and other intellectual property right infringements may and do occur.
Through contact with parties claiming infringement of their patented or otherwise exclusive
technology, or through our own monitoring of developments in patent and other intellectual property
right cases involving our competitors, we identify potential IPR infringements.
We estimate the outcome of all potential IPR infringements made known to us through assertion by
third parties, or through our own monitoring of patent and other IPRrelated cases in the relevant
legal systems. To the extent that we determine that an identified potential infringement will result in
a probable outflow of resources, we record a liability based on our best estimate of the expenditure
required to settle infringement proceedings. Based on these estimates and assumptions the provision
for IPR infringements was EUR 390 million in 2009 (EUR 343 million in 2008). The financial impact of
the assumptions regarding this provision mainly affects Devices & Services segment.
Our experience with claims of IPR infringement is that there is typically a discussion period with the
accusing party, which can last from several months to years. In cases where a settlement is not
reached, the discovery and ensuing legal process typically lasts a minimum of one year. For this
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