Acc 230 Week 7 Checkpoint Nortel Networks Case

ACC 230 Week 7 CheckPoint Nortel Networks Case

Resources: Ch. 5 of Understanding Financial Statements and Exhibit 5.1: A Checklist for Earnings Quality on p. 153 (Ch. 5)

Compose a 200- to 300-word response to Question 3 of the Nortel Networks Case on p. 182 (Ch. 5).

Refer to the checklist, Exhibit 1, on p. 153 (Ch. 5) for assistance with identifying quality issues.

3. Discuss the quality of the disclosures for guarantees and commitments. Could these disclosures be improved?

Many high-technology companies, like Nortel Networks, Micron Technology and JDS Uniphase, have written down substantial amounts of their inventory. For example, Nortel Networks revalued some of its inventory parts at $0, though the inventory initially cost Nortel $650 million. Companies are required to report whether they write off the cost value (or book value) or their inventory even if they do not dispose of the inventory. Later on, they may sell this inventory but are not required to report the sale for cash of previously “worthless” inventory. The effect may be that in future years, when the inventory is sold, profits are overstated.

Nortel does have agreements meeting the definition of guarantee under FIN 45. Payments based on charges involving assets, a liability or an equity security that was delivered by the third party must be made to that third party. Nortel has reserved liabilities relating to events that occurred prior to its sale. They have assured escrow for specified periods and have no limits on the maximum potential amount of these liabilities. It is common for such business sale agreements to omit maximum amounts as it is difficult to estimate the maximum potential liabilities for the purpose of indemnification assurances. Nortel has agreements with customers, lease agreements, third party debt, bank, agents and suppliers of intellectual property. No significant liability associated with these agreements has accrued on Nortel’s financial statements. Neither have...