Nortel Networks Case CheckPoint Nortel enters into guarantees that are defined and meet guidelines as laid out in FIN 45. Nortel typically indemnifies the purchaser of business that is conducted by Nortel in the event that a third party asserts a claim against the purchaser which would become a liability that is retained by Nortel as defined in their agreement. Nortel is has been unable to estimate the potential for maximum liability, since these type of indemnifications of guarantees do not have a maximum amount and the amounts are dependent upon the future contingent events.
As mentioned in Nortel’s notes they have not historically made any significant indemnifications payments under any of the agreements that have been accrued in their financial statements. Intellectual property indemnifications obligations have a maximum amount that may be paid under these agreements of $48 million as of December 31, 2004. Lease agreements maximum amount that Nortel can be reliable for paying is $7 million as of December 31, 2004 under these types of agreements.
Purchase commitments have been entered between Nortel and certain suppliers, which they commit to buy a minimum amount or percentage of products in exchange for price guarantees. Under this agreement Nortel has committed to $1,254 million worth of purchasers from suppliers. Operating leases for December 31, 2004 had a net of applicable sublease income of $179. Bid, performance and other related bonds have not historically proven to to have Nortel make material payments and does not anticipate any future payments.
Overall, Nortel has met all the guidelines that have been established by FASB guidelines and accounting standards that have been set forth to ensure accurate financial statements. Guarantees and commitments do not have to be reported on financial statements but are typically found in the notes that are provided. Although it would be sufficient for them to limit some of liabilities they are all within reason as far as a financial standpoint is concerned. Reference: Fraser, L. M. , & Ormiston, A. (2007). Understanding financial statements (8th ed. ). Upper Saddle River, NJ: Pearson/Prentice Hall.