Nokia 2009 Annual Report Download - page 87

reason, IPR infringement claims can last for varying periods of time, resulting in irregular movements
in the IPR infringement provision. In addition, the ultimate outcome or actual cost of settling an
individual infringement may materially vary from our estimates.
Legal Contingencies
As discussed in Item 8A7. “Litigation” and in Note 28 to the consolidated financial statements
included in Item 18 of this annual report, legal proceedings covering a wide range of matters are
pending or threatened in various jurisdictions against the Group. We record provisions for pending
litigation when we determine that an unfavorable outcome is probable and the amount of loss can
be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or
actual cost of settlement may materially vary from estimates.
Capitalized Development Costs
We capitalize certain development costs primarily in the Nokia Siemens Networks segment 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 7 to our
consolidated financial statements included in Item 18 of this annual report.
Impairment reviews are based upon our projections of anticipated discounted 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.
Business Combinations
We apply the purchase method of accounting to account for acquisitions of businesses. The cost of an
acquisition is measured as the aggregate of the fair values at the date of exchange of the assets
given, liabilities incurred, equity instruments issued, and costs directly attributable to the acquisition.
Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately
at their fair value as of the acquisition date. The excess of the cost of the acquisition over our interest
in the fair value of the identifiable net assets acquired is recorded as goodwill.
The determination and allocation of fair values to the identifiable assets acquired and liabilities
assumed is based on various assumptions and valuation methodologies requiring considerable
management judgment. The most significant variables in these valuations 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
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