Reliant FORM 10-K manual Goodwill impairment other acquisitions, Other special charges

purchase price was originally recorded as $2,818, payable in common shares of Nortel Networks, $2,318 of which was delivered upon closing and $500 of which was deferred. The deferred consideration could be reduced to zero if Nortel Networks met certain performance criteria under the OEM Agreement. The original accounting assumed the Purchase Agreement and the OEM Agreement were two transactions with separate economic value. As a result, the deferred consideration was included in the purchase price of the 980 NPLC business and any reduction in the deferred consideration over time was reflected as a reduction of cost of revenues.

Based on the re-examination, Nortel Networks has determined that it lacks sufficient independent evidence of the fair value of the OEM Agreement to record the Purchase Agreement and the OEM Agreement as separate transactions. Accordingly, as part of the Second Restatement, Nortel Networks revised the accounting for the Purchase Agreement and the OEM Agreement. The assets acquired from JDS have been valued based on the value of the consideration issued in accordance with the guidance in APB Opinion No. 16, “Business Combinations”; no value has now been attributed to the deferred consideration at the date of the acquisition and no purchase discounts have been subsequently recognized. Therefore, the purchase price and, as a result, the amount allocated to goodwill have been reduced by $500. The purchase price and the amount allocated to goodwill were further reduced by $25 for an unrelated correction to the liabilities assumed at acquisition. These reductions in the amount allocated to goodwill reduced the goodwill impairment subsequently recorded in June 2001 by $473 and reduced the amount of goodwill amortization for the year ended December 31, 2001 by $52. Other impacts included an increase to cost of revenues (reversing the previous reductions for purchase discounts) of $148 and $152 for the years ended December 31, 2002 and 2001, respectively, with corresponding reversals of these amounts which were previously recorded against common shares.

Goodwill impairment — other acquisitions

As part of the Second Restatement, a review of the accounting for various other acquisitions determined that adjustments were required to the amounts allocated to goodwill as a result of the corrections to purchase accounting allocations, and to correct valuations of the consideration paid. The adjustments related to purchase accounting allocations were as a result of the incorrect calculation of the valuation of deferred compensation on the acquisitions of Alteon WebSystems Inc. (“Alteon”) and CoreTek Inc. (“CoreTek”). In addition, Nortel Networks determined that it had incorrectly calculated the amount of consideration paid in the acquisition of CoreTek due to inappropriate measurement dates for valuing the equity instruments issued. The reductions in the amounts allocated to goodwill reduced the goodwill impairment that was subsequently recorded in June 2001 by $222, and reduced the amount of goodwill amortization for the year ended December 31, 2001 by $39. Other impacts included an increase to deferred stock option compensation expense of $24 and $123 for the years ended December 31, 2002 and 2001, respectively.

Other special charges

As part of the Second Restatement, inventory impairments of $89 previously incorrectly classified as special charges in the year ended December 31, 2002 were reclassified to cost of revenues. Also impacting special charges were adjustments for restructuring related to contract settlement costs, including real estate related items, severance and fringe benefit related costs and plant and equipment impairment costs. Nortel Networks determined that these items were either recorded in special charges in error or, although correctly recorded when originally recognized, were not adjusted in the appropriate subsequent periods for changes in estimates and/or assumptions. The adjustments to special charges for these other items were an increase of $11 and a decrease of $150 for the years ended December 31, 2002 and 2001, respectively. The following presents the impact of these other adjustments on special charges for the years ended December 31:

		2002		2001
Other adjustments
Contract settlement costs	$	36	$	(85)
Severance and fringe benefit related costs		(21)		(35)
Plant and equipment impairment costs		(4)		(30)
Increase (decrease) to special charges	$	11	$	(150)

Other

Other adjustments were primarily to correct certain accruals, provisions or other transactions which were either initially recorded incorrectly in prior periods, or not properly released or adjusted for changes in estimates and/or assumptions in the appropriate subsequent periods. The components of these adjustments are described below.

F-25