Nokia 2007 Annual Report Download - page 71

supportable, it is more likely than not that certain positions will be challenged and may not be fully
sustained upon review by tax authorities.
If the final outcome of these matters differs from the amounts initially recorded, differences will
impact the income tax and deferred tax provisions in the period in which such determination is
made.
Pensions
The determination of our pension benefit obligation and expense for defined benefit pension plans is
dependent on our selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in Note 5 to our consolidated financial statements and include,
among others, the discount rate, expected longterm rate of return on plan assets and annual rate of
increase in future compensation levels. A portion of our plan assets is invested in equity securities.
The equity markets have experienced volatility, which has affected the value of our pension plan
assets. This volatility may make it difficult to estimate the longterm rate of return on plan assets.
Actual results that differ from our assumptions are accumulated and amortized over future periods
and therefore generally affect our recognized expense and recorded obligation in such future periods.
Our assumptions are based on actual historical experience and external data regarding compensation
and discount rate trends. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions may materially affect
our pension obligation and our future expense.
Sharebased compensation
We have various types of equity settled sharebased compensation schemes for employees. Employee
services received, and the corresponding increase in equity, are measured by reference to the fair
value of the equity instruments as at the date of grant, excluding the impact of any nonmarket
vesting conditions. Fair value of stock options is estimated by using the Black Scholes model on the
date of grant based on certain assumptions. Those assumptions are described in Note 22 to the
consolidated financial statements and include, among others, the dividend yield, expected volatility
and expected life of stock options. The expected life of stock options is estimated by observing
general option holder behavior and actual historical terms of Nokia stock option programs, whereas
the assumption of the expected volatility has been set by reference to the implied volatility of stock
options available on Nokia shares in the open market and in light of historical patterns of volatility.
These variables make estimation of fair value of stock options difficult.
Nonmarket vesting conditions attached to the performance shares are included in assumptions about
the number of shares that the employee will ultimately receive relating to projections of sales and
earnings per share. On a regular basis we review the assumptions made and revise the estimates of
the number of performance shares that are expected to be settled, where necessary. At the date of
grant the number of performance shares granted to employees that are expected to be settled is
assumed to be the target amount. Any subsequent revisions to the estimates of the number of
performance shares expected to be settled may increase or decrease total compensation expense.
Such increase or decrease adjusts the prior period compensation expense in the period of the review
on a cumulative basis for unvested performance shares for which compensation expense has already
been recognized in the profit and loss account, and in subsequent periods for unvested performance
shares for which the expense has not yet been recognized in the profit and loss account. Significant
differences in employee option activity, equity market performance and our projected and actual sales
and earnings per share performance may materially affect future expense. In addition, the value, if
any, an employee ultimately receives from sharebased payment awards may not correspond to the
expense amounts recorded by the Group.
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