Nokia (FIN) provided the following disclosure in a recent annual report.
Use of Estimates (Partial)
The preparation of financial statements in conformity with IFRS requires the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty.... (below and on the next page) are areas requiring significant judgment and estimation that may have an impact on reported results and the financial position.
Revenue Recognition
Sales from the majority of the Group are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Sales may materially change if management's assessment of such criteria was determined to be inaccurate. The Group makes price protection adjustments based on estimates of future price reductions and certain agreed customer inventories at the date of the price adjustment. Possible changes in these estimates could result in revisions to the sales in future periods.
Revenue from contracts involving solutions achieved through modification of complex telecommunications equipment is recognized on the percentage of completion basis when the outcome of the contract can be estimated reliably. Recognized revenues and profits are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. Current sales and profit estimates for projects may materially change due to the early stage of a long-term project, new technology, changes in the project scope, changes in costs, changes in timing, changes in customers' plans, realization of penalties, and other corresponding factors.
Instructions
a. Briefly discuss how Nokia's revenue recognition policies are consistent with the revenue recognition principle. Evaluate both:
1. Sales.
2. Revenue from contracts.
b. Briefly discuss how estimates inherent in Nokia's revenue recognition policies can result in reported revenue numbers that are not relevant and faithful representations.
c. Assume that Nokia's competitors use similar revenue recognition policies for their sales. What are some of the judgments inherent in applying those policies that could raise concerns with respect to the qualitative characteristic of comparability?