Nokia 2010 Annual Report Download - page 97

Business Combinations
We apply the acquisition method of accounting to account for acquisitions of businesses. The
consideration transferred in a business combination is measured as the aggregate of the fair values of
the assets transferred, liabilities incurred towards the former owners of the acquired business and
equity instruments issued. Acquisitionrelated costs are recognized as expense in profit and loss in
the periods when the costs are incurred and the related services are received. Identifiable assets
acquired and liabilities assumed are measured separately at their fair value as of the acquisition date.
Noncontrolling interests in the acquired business are measured separately based on their
proportionate share of the identifiable net assets of the acquired business. 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 the
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. Although we believe that the assumptions
applied in the determination are reasonable based on information available at the date of
acquisition, actual results may differ from the forecasted amounts and the difference could be
material.
Valuation of Longlived Assets, Intangible Assets and Goodwill
We assess the carrying amount of identifiable intangible assets and longlived assets if events or
changes in circumstances indicate that such carrying amount may not be recoverable. We assess the
carrying amount of our goodwill at least annually, or more frequently based on these same
indicators. 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 these assets or the strategy for our overall
business; and
• significantly negative industry or economic trends.
When we determine that the carrying amount 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 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. In assessing goodwill,
these discounted cash flows are prepared at a cash generating unit level. Amounts estimated could
differ materially from what will actually occur in the future.
Goodwill is allocated to the Group’s cashgenerating units (CGU) and discounted cash flows are
prepared at CGU level for the purpose of impairment testing. The allocation of goodwill to our CGUs is
made in a manner that is consistent with the level at which management monitors operations and
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