Nokia in 2005 The device on the cover is a Nokia 6233. Review by the Board of Directors and Nokia Annual Accounts 2005 Key data 2005 ....................................................................................................................................... 2 Review by the Board of Directors ............................................................................................... 3 Annual Accounts 2005 Consolidated profi t and loss accounts, IFRS ..................................................................................... 6 Consolidated balance sheets, IFRS ...................................................................................................... 7 Consolidated cash fl ow statements, IFRS ......................................................................................... 8 Statements of changes in shareholders’ equity, IFRS ................................................................. 10 Notes to the consolidated fi nancial statements ........................................................................... 11 Profi t and loss accounts, parent company, FAS ............................................................................. 38 Balance sheets, parent company, FAS .............................................................................................. 38 Cash fl ow statements, parent company, FAS ................................................................................. 39 Notes to the fi nancial statements of the parent company ........................................................ 40 Nokia shares and shareholders ......................................................................................................... 44 Nokia 2000 – 2005, IFRS ........................................................................................................................ 48 Calculation of key ratios ...................................................................................................................... 50 Proposal by the Board of Directors to the Annual General Meeting ....................................... 51 Auditors’ report ..................................................................................................................................... 52 Additional information US GAAP .................................................................................................................................................... 54 Critical accounting policies ................................................................................................................ 59 Group Executive Board ........................................................................................................................ 62 Board of Directors ................................................................................................................................. 64 Risk factors .............................................................................................................................................. 66 Corporate governance ......................................................................................................................... 68 Investor information ............................................................................................................................ 83 Contact information ............................................................................................................................. 84 Key data Based on fi nancial statements according to International Financial Reporting Standards, IFRS Nokia, EURm Net sales Operating profi t Profi t before taxes Net profi t Research and development Return on capital employed, % Net debt to equity (gearing), % 2005 34 191 4 639 4 971 3 616 3 825 36.7 – 77 2004 As revised Change, % 29 371 4 326 4 705 3 192 3 776 31.5 – 79 16 7 6 13 1 20 12 EUR Earnings per share, basic Dividend per share Average number of shares (1 000 shares) * Board’s proposal 0.83 0.37 * 4 365 547 0.69 0.33 4 593 196 Business Groups, EURm Mobile Phones Net sales Operating profi t Multimedia Net sales Operating profi t Enterprise Solutions Net sales Operating profi t Networks Net sales Operating profi t Personnel, December 31 Mobile Phones Multimedia Enterprise Solutions Networks Common Group Functions Nokia Group 10 major markets, net sales, EURm China USA UK India Germany Russia Italy Spain Saudi Arabia France 10 major countries Personnel, December 31 Finland United States China Hungary Germany Brazil UK Mexico India Denmark 2005 20 811 3 598 5 981 836 861 – 258 6 557 855 2005 2 716 2 799 2 092 18 332 32 935 58 874 2005 3 403 2 743 2 405 2 022 1 982 1 410 1 160 923 897 870 2005 23 485 5 883 5 860 4 186 3 610 2 184 1 956 1 901 1 609 1 362 2004 As revised Change, % 18 521 3 786 3 676 175 839 – 210 6 431 884 12 – 5 63 3 2 – 3 2004 Change, % 6 2 – 6 10 5 6 2 558 2 738 2 234 16 595 31 380 55 505 2004 As revised 2 678 3 430 2 269 1 369 1 730 946 884 768 750 604 2004 23 069 6 706 4 788 3 778 3 522 2 640 1 903 1 160 591 1 296 Main currencies, rates at the end of 2005 1 EUR USD 1.1972 GBP 0.6784 SEK 9.4326 JPY 139.29 2 Nokia in 2005 Review by the Board of Directors 2005 Nokia’s net sales increased 16% to EUR 34 191 million (EUR 29 371 million). Sales of Mobile Phones increased 12% to EUR 20 811 million (EUR 18 521 million). Sales of Multimedia increased 63% to EUR 5 981 million (EUR 3 676 million). Sales of Enterprise Solutions increased 3% to EUR 861 million (EUR 839 million). Sales of Networks increased 2% to EUR 6 557 million (EUR 6 431 million). Nokia’s operating profi t for 2005 increased 7% to EUR 4 639 million, including net positive special items of EUR 80 million (operating profi t of EUR 4 326 million in 2004, including net positive special items of EUR 33 million), representing a 2005 operating margin of 13.6% (14.7%). Operating profi t in Mobile Phones decreased 5% to EUR 3 598 million (operating profi t of EUR 3 786 million in 2004), representing a 2005 operating margin of 17.3% (20.4%). Operating profi t in Multimedia increased to EUR 836 million, including net positive special items of EUR 4 million (operating profi t of EUR 175 million in 2004), representing a 2005 operating margin of 14.0% (4.8%). Enterprise Solu- tions operating loss was EUR 258 million, including a EUR 29 million restructuring charge (operating loss of EUR 210 million in 2004). Operating profi t in Networks decreased to EUR 855 million, including net positive special items of EUR 60 million (operating profi t of EUR 884 million in 2004, including net negative special items of EUR 115 million) representing a 2005 operat- ing margin of 13.0% (13.7%). Common Group expenses totaled EUR 392 million, including EUR 45 million gain for real estate sales. Common Group expenses in 2004 totaled 309 million, including a one time positive item of EUR 160 million representing the premium returns under our multi- line, multi-year insurance program, which expired in 2004, and a EUR 12 million loss from the divestiture of Nextrom. In 2005, net fi nancial income was EUR 322 million (EUR 405 million), including a EUR 57 million gain for the sale of the France Telecom bond (EUR 106 million gain in 2004). Profi t before tax and minority interests was EUR 4 971 million (EUR 4 705 million). Net profi t totaled EUR 3 616 million (EUR 3 192 million). Earnings per share increased to EUR 0.83 (basic) and EUR 0.83 (diluted), compared to EUR 0.69 (basic) and EUR 0.69 (diluted) in 2004. tions running on device platforms from Nokia would be EUR 340 million in 2005 alone. As of December 31, 2005, our net debt-to-equity ratio (gearing) was – 77% (– 79% as of December 31, 2004). In 2005, capital expenditure amounted to EUR 607 million (EUR 548 million). Global reach In 2005, Europe accounted for 42% of Nokia’s net sales (41% in 2004), Asia-Pacifi c 18% (16%), China 11% (10%), North America 8% (12%), Latin America 8% (9%), and Middle East & Africa 13% (12%). The 10 markets in which Nokia generated the greatest net sales in 2005 were, in descending order of magnitude, China, the US, the UK, India, Germany, Russia, Italy, Spain, Saudi Arabia and France, together representing 52% of total net sales in 2005. In comparison, the 10 markets in which Nokia generated the greatest net sales in 2004 were the US, China, the UK, Germany, India, Brazil, Rus- sia, the United Arab Emirates, Italy and Spain, together representing 55 % of total net sales in 2004. Research and development, and technology As of December 31, 2005, we employed 20 882 people in research and development in 26 countries, repre- senting approximately 36% of Nokia’s total workforce. R&D expenses totaled EUR 3 825 million in 2005, an increase of 1% from 2004 (EUR 3 776 million). R&D ex- penses represented 11.2% of Nokia’s net sales in 2005, compared to 12.9% of net sales in 2004. In February 2005, Nokia introduced the S60 Plat- form 3rd Edition, aimed at supporting the platform’s expansion into the mid range and catering to new segments such as multimedia and enterprise. By year end, S60 licensees had introduced a cumulative total of 34 smartphone models based on the platform, strengthening S60’s position as the industry’s number one smartphone platform. During the year, Nokia introduced 14 devices based on the Symbian OS, upon which the S60 platform is built. Memberships in Forum Nokia, the world’s largest mobile application developer community, passed the 2 million mark in May 2005. Forum Nokia estimated, in November 2005, that the total global revenue earned by third party developers from mobile Java applica- Nokia in mobile devices in 2005 In our Mobile Phones, Multimedia and Enterprise Solutions business groups, combined mobile device volumes were up 28% in 2005, compared to 2004, reaching 265 million units – a new annual volume record for Nokia. Market volume for the same period was estimated at 795 million units, an increase of 24%. Based on our preliminary market estimate, Nokia’s market share grew to 33% in 2005, compared to 32% in 2004. In smartphones, according to Nokia estimates, the total industry volume reached approximately 46.3 million units in 2005, compared to an estimated 20.6 million units in 2004. Nokia’s own smartphone volumes in 2005 grew to 28.5 million units, compared to 11.8 million units in 2004. Nokia shipped more than 40 million mobile devices with an integrated music player in 2005. Mobile Phones in 2005 During 2005, Mobile Phones introduced 41 new mobile device models, including 18 new CDMA phones. Of the new models, 32 were in the mid range or high end, while nine were at the entry level. Launch highlights from 2005: » Nokia’s fi rst operator-specifi c designs, including the Nokia 6102 and Nokia 6234 » Mobile Phones fi rst 3G phones for the mass mar- ket: the Nokia 6280/6282 and Nokia 6233/6234 » Mobile Phones fi rst music phone: the Nokia 3250 » The L’Amour fashion collection: the Nokia 7380, Nokia 7370 and Nokia 7360 The high end Nokia 6230 and Nokia 6230i were Nokia’s highest revenue generating phones in 2005. These two products were also the industry’s best selling devices in Europe during each month of the year. By the end of 2005, our combined cumulative volumes of the two devices had reached approximately 25 million units. >>> Review by the Board of Directors 3 Review by the Board of Directors Multimedia in 2005 Multimedia’s business continued to develop well in 2005, driven by growing demand for converged mobile devices with advanced imaging, music, web browsing and email functionality. Nokia became the global market leader in 3G/WCDMA devices during the year, as a result of high sales of products such as the Nokia 6680 and the Nokia 6630, as well as the Nokia N70 towards the end of 2005. A key development during the year was the launch of the Nokia Nseries sub-brand and mul- timedia computer product category. In 2005, we announced six Nokia Nseries multimedia computer models, two of which began shipping during the year. Targeting early adopters and technology leaders, these advanced mobile devices include Carl Zeiss optics, megapixel cameras, multi-gigabyte memories, stereo sound, VHS resolution video and WLAN con- nectivity. Other developments in 2005 include: » » » » » The launch of the Nokia 770 Internet Tablet, our fi rst device in the new Internet Tablet category The announcement of collaboration agreements with Yahoo!, Carl Zeiss, Microsoft, Bose, Harman Kardon, JBL and Sennheiser The launch of the world’s fi rst DVB-H enabled mobile device, the Nokia N92 Cumulative deliveries of Nokia’s Mobile Broadcast Solution server 3.0 reached 25 by year end The announcement of plans to expand the N-Gage multiplayer gaming experience across a range of Nokia smartphones and Nokia Nseries devices Net sales by business group Jan. 1 – Dec. 31 Mobile Phones Multimedia Enterprise Solutions Networks Inter-business group eliminations Nokia Group 2005 EURm 20 811 5 981 861 6 557 –19 34 191 % 61 17 3 19 – 100 2004 EURm 18 521 3 676 839 6 431 –96 29 371 % Change 63 12 3 22 – 100 12 63 3 2 – 16 Operating profi t by business group Jan. 1 – Dec. 31 Mobile Phones Multimedia Enterprise Solutions Networks Common Group Expenses Nokia Group 2005 EURm % of net sales 3 598 836 –258 855 –392 4 639 17.3 14.0 –30.0 13.0 – 13.6 2004 EURm 3 786 175 –210 884 –309 4 326 % of net sales 20.4 4.8 –25.0 13.7 – 14.7 4 Nokia in 2005 Enterprise Solutions in 2005 In 2005, the Nokia 9500 Communicator and Nokia 9300 enterprise smartphone began shipping in volumes. Nokia also began shipping both devices with BlackBerry Connect software, reaching more than 30 operators and distributors worldwide. Enterprise Solutions made a number of announcements during the year, including: » » » » » The launch of the Nokia Business Center software solution The pending acquisition of Intellisync The launch of the Nokia Eseries devices A licensing agreement for Microsoft Corp’s Active- Sync to enable direct over-the-air synchroniza- tion between Nokia enterprise mobile devices and the Microsoft Exchange Server 2003 Plans to work closely with Cisco, OnRelay, and Avaya on enterprise options for mobile voice Networks in 2005 During 2005, Networks announced 16 contracts in 3G/WCDMA, including agreements with 10 new cus- tomers. By year end, Nokia had supplied to a total of 44 of the 100 operators that had launched commercial 3G/WCDMA services to date. In the growing HSDPA market we announced seven deals, bringing Nokia’s total HSDPA references to 20. In GSM, EDGE and GPRS, we signed some 20 contracts in 2005. By year end, Nokia had delivered GSM/EDGE technology to more than 130 customers in nearly 70 countries, was a supplier to 45 of the 121 operators that had launched EDGE commercially, and had signed more than 50 contracts for EDGE. In core networks, Nokia cemented its leader- ship in the 3GPP Release 4 mobile softswitch market, with 60 deals for the Nokia MSC Server System (MSS) during 2005. In the IP Multimedia Subsystem (IMS) market, Nokia won 11 commercial deals and trialed the solution with almost 20 operators. In GSM-based Push to Talk over Cellular, we won contracts with 24 new customers in 2005. In fi xed-mobile convergence, we concluded agreements with 10 customers and launched our Voice over IP (VoIP) server. Review by the Board of Directors of the share capital of the company and the total voting rights. The total number of shares at December 31, 2005 was 4 433 886 540. On December 31, 2005, Nokia’s share capital was EUR 266 033 192.40. Outlook for the full year 2006 Nokia expects the mobile device market volume to grow more than 10% in 2006, from our preliminary es- timate of approximately 795 million units in 2005. We also expect the device industry to experience value growth in 2006, but expect some decline in industry ASPs, primarily refl ecting the increasing impact of the emerging markets. Nokia expects moderate growth in the mobile infrastructure market in euro terms in 2006. Nokia’s goal is to increase its market share both in mobile devices and the infrastructure market, in order to build on its industry leading position. Dividend Nokia’s Board of Directors will propose a dividend of EUR 0.37 per share for 2005. Review by the Board of Directors 5 Nokia’s Services Business unit was created at the start of 2005, focusing on managed services, consult- ing and integration. By year end, Services accounted for more than 30 percent of Networks revenues, and major deals included a managed services contract with Bharti Tele-Ventures. During 2005, Networks honed its business focus, selling its professional mobile radio business to EADS. We also entered new growth markets like Bangladesh and Vietnam, and established a new presence in countries such as Tunisia. Acquisitions and divestments In November 2005, Nokia announced the acquisition of Intellisync Corporation, a leader in platform-inde- pendent wireless messaging and mobile software. This acquisition is planned to position Nokia to deliver the industry’s most complete offering for the develop- ment, deployment and management of mobility in the enterprise. The transaction is also planned to enhance Nokia’s ability to respond to customer needs in this fast growing market. The acquisition is currently scheduled to be completed during the fi rst quarter of 2006, subject to the approval of Intellisync sharehold- ers and other customary closing conditions. In September 2005, Nokia’s Professional Mobile Radio business, including TETRA infrastructure and terminals, was acquired by and transferred to EADS. Changes in the management The Board of Directors has released Mr. Jorma Ollila, Chairman and CEO, upon his request from his duties as the CEO and Chairman of the Group Executive Board effective June 1, 2006. Mr. Olli-Pekka Kallasvuo was appointed President and COO as of October 1, 2005 and President and CEO and Chairman of the Group Executive Board as of June 1, 2006. Mr. Pekka Ala-Pietilä, formerly President of Nokia and Head of Customer and Market Operations, resigned from the Group Executive Board and his position as President effective October 1, 2005. Personnel The average number of personnel for 2005 was 56 896 (53 511 for 2004). At the end of 2005, Nokia employed 58 874 people worldwide (55 505 at year end 2004). In 2005, Nokia’s personnel increased by a total of 3 369 employees (increase of 4 146 in 2004). Shares and share capital In 2005, Nokia’s share capital increased by EUR 7 514.40 as a result of the issue of 125 240 new shares upon exercise of stock options issued to personnel in 2003. As a result of the new share issues, Nokia received a total of EUR 1 659 743.60 in additional shareholders’ equity in 2005. Effective April 22, 2005, a total of 230 million shares held by the company were cancelled pursuant to the shareholders’ resolution taken at the Annual General Meeting on April 7, 2005. As a result of the cancellation, the share capital was reduced by the aggregate par value of the shares cancelled, EUR 13 800 000, which corresponded to less than 5% of the share capital of the company and the total voting rights at that time. The cancellation did not reduce the shareholders’ equity. Neither the aforementioned issuances nor the cancellation of shares had any signifi cant effect on the relative hold- ings of the other shareholders of the company nor on their voting power. Nokia repurchased through its share repurchase plans a total of 315 010 000 shares on the Helsinki Exchange at an aggregate price of approximately EUR 4 265 billion during the period from January 28, 2005 to December 23, 2005. The price paid was based on the market price at the time of repurchase. The shares were repurchased to be used for the purposes specifi ed in the authorizations given by the Annual General Meetings of 2004 and 2005 to the Board. The aggregate par value of the shares purchased was EUR 18 900 600, representing approximately 7.10% of the share capital of the company and the total voting rights. These new holdings did not have any signifi - cant effect on the relative holdings of the other share- holders of the company nor on their voting power. On December 31, 2005, Nokia and its sub- sidiary companies owned 261 511 283 Nokia shares. The shares had an aggregate par value of EUR 15 690 676.98, representing approximately 5.9% Consolidated fi nancial statements according to IFRS Consolidated profi t and loss accounts, IFRS Financial year ended December 31 Notes Net sales Cost of sales Gross profit Research and development expenses Selling and marketing expenses Administrative and general expenses Other income Other expenses Customer finance impairment charges, net of reversals Impairment of goodwill Amortization of goodwill 7 8 8, 9 9 9 11 Operating profit 3, 4, 5, 6, 7, 8, 9, 10, 11 Share of results of associated companies Financial income and expenses Profit before tax Tax Profit before minority interests Minority interests 34 12 13 2005 EURm 34 191 – 22 209 2004 As revised EURm 29 371 – 18 179 2003 As revised EURm 29 533 – 17 325 11 982 – 3 825 – 2 961 – 609 285 – 233 – – – 4 639 10 322 4 971 – 1 281 3 690 – 74 11 192 – 3 776 – 2 564 – 611 343 – 162 – – – 96 4 326 – 26 405 4 705 – 1 446 3 259 – 67 12 208 – 3 788 – 2 657 – 635 300 – 384 226 – 151 – 159 4 960 – 18 352 5 294 – 1 697 3 597 – 54 Profit attributable to equity holders of the parent 3 616 3 192 3 543 Earnings per share (for profit attributable to the equity holders of the parent) 31 EURm 2005 Basic Diluted 0.83 0.83 2004 As revised EURm 0.69 0.69 2003 As revised EURm 0.74 0.74 Average number of shares (1 000 shares) Basic Diluted See Notes to consolidated financial statements. 31 2005 2004 2003 4 365 547 4 371 239 4 593 196 4 600 337 4 761 121 4 761 160 6 Nokia in 2005 Consolidated fi nancial statements according to IFRS Consolidated balance sheets, IFRS December 31 ASSETS Non-current assets Capitalized development costs Goodwill Other intangible assets Property, plant and equipment Investments in associated companies Available-for-sale investments Deferred tax assets Long-term loans receivable Other non-current assets Current assets Inventories Accounts receivable, net of allowances for doubtful accounts (2005: EUR 281 million, 2004: EUR 361 million) Prepaid expenses and accrued income Other financial assets Available-for-sale investments Available-for-sale investments, liquid assets Available-for-sale investments, cash equivalents Bank and cash Total assets SHAREHOLDERS’ EQUITY AND LIABILITIES Capital and reserves attributable to equity holders of the parent Share capital Share issue premium Treasury shares, at cost Translation differences Fair value and other reserves Retained earnings Minority interests Total equity Non-current liabilities Long-term interest-bearing liabilities Deferred tax liabilities Other long-term liabilities Current liabilities Short-term borrowings Accounts payable Accrued expenses Provisions 2005 Notes EURm 2004 As revised EURm 14 14 14 15 16 17 27 18 260 90 211 1 585 193 246 692 63 7 3 347 19, 21 1 668 20, 21 20 17 17 17, 35 35 23 22 25 26 27 28 29 30 5 346 1 938 89 – 6 852 1 493 1 565 18 951 22 298 266 2 458 – 3 616 69 – 176 13 154 12 155 205 12 360 21 151 96 268 377 3 494 3 320 2 479 9 670 278 90 209 1 534 200 169 623 – 58 3 161 1 305 4 382 1 429 595 255 9 085 1 367 1 090 19 508 22 669 280 2 366 – 2 022 – 126 13 13 720 14 231 168 14 399 19 179 96 294 215 2 669 2 604 2 488 7 976 Total shareholders’ equity and liabilities 22 298 22 669 See Notes to consolidated financial statements. Consolidated fi nancial statements 7 Consolidated fi nancial statements according to IFRS Consolidated cash fl ow statements, IFRS 2005 Financial year ended December 31 Notes EURm 2004 As revised EURm 2003 As revised EURm Cash flow from operating activities Profit attributable to equity holders of the parent Adjustments, total Profit attributable to equity holders of the parent before change in net working capital Change in net working capital Cash generated from operations Interest received Interest paid Other financial income and expenses, net received 35 35 Income taxes paid Net cash from operating activities Cash flow from investing activities Acquisition of Group companies Purchase of current available-for-sale investments, liquid assets Purchase of non-current available-for-sale investments Purchase of shares in associated companies Additions to capitalized development costs Long-term loans made to customers Proceeds from repayment and sale of long-term loans receivable Proceeds from (+) / payment of (–) other long-term receivables Proceeds from short-term loans receivable Capital expenditures Proceeds from disposal of shares in Group companies, net of disposed cash Proceeds from disposal of shares in associated companies Proceeds from disposal of businesses Proceeds from maturities and sale of current available-for-sale investments, liquid assets Proceeds from sale of current available-for-sale investments Proceeds from sale of non-current available-for-sale investments Proceeds from sale of fixed assets Dividends received Net cash from (used in) investing activities Cash flow from financing activities Proceeds from stock option exercises Purchase of treasury shares Proceeds from long-term borrowings Repayment of long-term borrowings Proceeds from (+) / repayment of (–) short-term borrowings Dividends paid Net cash used in financing activities Foreign exchange adjustment Net increase (+) / decrease (–) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 3 616 1 774 5 390 – 366 5 024 353 – 26 47 – 1 254 4 144 3 192 2 059 5 251 241 5 492 204 – 26 41 – 1 368 4 343 3 543 2 992 6 535 – 184 6 351 256 – 33 118 – 1 440 5 252 – 92 – 7 277 – – 7 – 10 318 – 11 695 – 89 – 16 – 153 – 56 – 14 182 – 607 5 18 95 9 402 247 3 167 1 1 844 2 – 4 258 5 – 212 – 1 531 – 5 570 183 601 2 457 3 058 – 388 – 109 – 101 – 368 2 66 – 548 1 – – 9 737 587 346 6 22 – 329 – – 2 648 1 – 3 – 255 – 1 413 – 4 318 – 23 – 327 2 784 2 457 – 282 – 61 – 218 – 97 315 – 18 63 – 432 – – – 8 793 – 381 19 24 – 3 215 23 – 1 355 8 – 56 – 22 – 1 378 – 2 780 – 146 – 889 3 673 2 784 8 Nokia in 2005 Consolidated fi nancial statements according to IFRS Consolidated cash fl ow statements, IFRS (continued) Financial year ended December 31 Notes EURm 2005 2004 As revised EURm 2003 As revised EURm Cash and cash equivalents comprise of: Bank and cash Current available-for-sale investments, cash equivalents 1 565 1 090 17, 38 1 493 3 058 1 367 2 457 1 145 1 639 2 784 See Notes to consolidated financial statements. The figures in the consolidated cash flow statement cannot be directly traced from the balance sheet without additional information as a result of acquisitions and dis- posals of subsidiaries and net foreign exchange differences arising on consolidation. Consolidated fi nancial statements 9 Consolidated fi nancial statements according to IFRS Consolidated statements of changes in shareholders’ equity, IFRS Fair value Before Group, EURm Number of shares (000’s) Share Share issue capital premium Treasury Translation and other Retained minority Minority interests reserves earnings shares differences interests Total Balance at January 1, 2003 4 786 762 287 2 225 – 20 135 Impact of implementing IAS 39(R) Revised balance at January 1, 2003 4 786 762 287 2 225 – 20 135 Tax benefit on stock options exercised Translation differences Net investment hedge gains Cash flow hedges, net of tax 1 Available-for-sale investments, net of tax Other increase, net Profit 1 Total recognized income and expense Share issue related to acquisitions Stock options exercised Stock options exercised related to acquisitions Share-based compensation 1, 2 Acquisition of treasury shares Reissuance of treasury shares Dividend – 95 339 460 1 225 7 160 13 13 18 22 – 6 41 – 1 Total of other equity movements Revised balance at December 31, 2003 4 700 268 1 288 75 2 313 – 1 353 – 1 373 – 7 – 21 – 28 10 98 – 375 155 – – 220 108 – 1 363 10 – – 85 – 119 78 – 80 – 1 – 66 Translation differences Net investment hedge gains Cash flow hedges, net of tax 1 Available-for-sale investments, net of tax Other decrease, net Profit (1) Total recognized income and expense Stock options exercised Stock options exercised related to acquisitions Share-based compensation 1, 2 Acquisition of treasury shares Reissuance of treasury shares Cancellation of treasury shares Dividend – 214 120 788 Total of other equity movements Revised balance at December 31, 2004 4 486 941 Tax benefit on stock options exercised Translation differences Net investment hedge losses Cash flow hedges, net of tax Available-for-sale investments, net of tax Other decrease, net Profit 5 – – – 8 – 8 280 Total recognized income and expense – 125 Stock options exercised Stock options exercised related to acquisitions Share-based compensation 2 Acquisition of treasury shares Reissuance of treasury shares Cancellation of treasury shares Dividend – 315 174 484 Total of other equity movements Balance at December 31, 2005 4 172 376 – 14 – 14 266 – – – 8 53 8 – – 41 – 67 – 2 661 14 1 998 53 – 649 2 366 – 2 022 – 2 – – 126 406 – 211 – 13 – 132 – 57 – 2 2 – 1 79 14 94 2 458 – 195 – 189 – 4 268 10 2 664 – 1 594 – 3 616 – 69 – – 176 11 661 14 281 173 14 454 21 11 682 40 3 543 3 583 – 1 340 – 1 340 13 925 – 1 3 192 3 191 – 1 998 – 1 398 – 3 396 13 720 – 55 3 616 3 561 – 2 664 – 1 463 – 4 127 13 154 14 281 13 – 375 155 10 98 40 3 543 3 484 18 23 – 6 41 – 1 363 10 – 1 340 – 2 617 15 148 – 119 78 – 1 – 66 – 1 3 192 3 083 – – 8 53 – 2 661 14 – – 1 398 – 4 000 14 231 – 2 406 – 211 – 132 – 57 – 55 3 616 3 565 2 – 1 79 – 4 268 10 – – 1 463 – 5 641 12 155 173 – 33 8 54 29 – 38 – 38 164 – 16 – 5 67 46 – 42 – 42 168 31 1 74 106 – 69 – 69 205 14 454 13 – 408 155 10 98 48 3 597 3 513 18 23 – 6 41 – 1 363 10 – 1 378 – 2 655 15 312 – 135 78 – 1 – 66 – 6 3 259 3 129 – – 8 53 – 2 661 14 – – 1 440 – 4 042 14 399 – 2 437 – 211 – 132 – 57 – 54 3 690 3 671 2 – 1 79 – 4 268 10 – – 1 532 – 5 710 12 360 1 2 2003 and 2004 financial statements have been revised to reflect the retrospective implementation of IFRS 2 and IAS 39(R). See Note 2. Dividends declared per share were EUR 0.37 for 2005 (EUR 0.33 for 2004 and EUR 0.30 for 2003), subject to shareholders’ approval. Share-based compensation is shown net of deferred compensation recorded related to social security costs on share-based payments 10 Nokia in 2005 Notes to the consolidated fi nancial statements Notes to the consolidated financial statements 1. Accounting principles Basis of presentation The consolidated fi nancial statements of Nokia Corporation (“Nokia” or “the Group”), a Finnish limited liability company with domicile in Helsinki, are prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated fi nancial statements are presented in millions of euros (EURm), except as noted, and are prepared under the historical cost convention, except as disclosed in the accounting policies below. The notes to the consolidated fi nancial statements also conform with Finnish Accounting legislation. As of January 1, 2005 the Group adopted IFRS 2, Share-based Payment. The standard requires the recognition of share-based payment transactions in fi nancial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the Company. Prior to the adoption of IFRS 2, the Group did not recognize the fi nancial effect of share-based payments until such payments were settled. In accordance with the tran- sitional provisions of IFRS 2, the Standard has been applied retrospectively to all grants of shares, share options or other equity instruments that were granted after November 7, 2002 and that were not yet vested at the effective date of the standard. the Group has changed its accounting policy for the translation differences of goodwill arising on acquisi- tions of foreign companies made after January 1, 2005. Goodwill on acquisitions of foreign companies made prior to that is translated to euros at historical rates. In accordance with IAS 21(R), goodwill on acquisitions of foreign companies made after January 1, 2005, is translated into euros at closing rates. The impacts of IFRS 3 and IAS 21(R) are prospec- tive from January 1, 2005. The adoption of IFRS 3, IAS 21(R), IAS 36(R) and IAS 38(R) did not have any impact to the Group’s fi nancial position, results of operations or cash fl ows. Principles of consolidation The consolidated fi nancial statements include the accounts of Nokia’s parent company (“Parent Com- pany”), and each of those companies in which it either owns, directly or indirectly through subsidiaries, over 50 % of the voting rights, or over which it has control of their operating and fi nancial policies. The Group’s share of profi ts and losses of associated companies (generally 20 % to 50 % voting rights or over which the Group has signifi cant infl uence) is included in the consolidated profi t and loss account in accordance with the equity method of accounting. As of January 1, 2005 the Group adopted IAS 39(R), All inter-company transactions are eliminated as Financial Instruments: Recognition and Measure- ment, which supersedes IAS 39 (revised 2000). Under IAS 39(R), hedge accounting is no longer allowed under Treasury Center foreign exchange netting. This change is retrospective for the Group as an existing IFRS user. The comparative fi gures for 2004 and 2003 have been revised to refl ect the adoption of IFRS 2 and IAS 39(R) and the effects are summarized in the consolidated statement of changes in shareholders’ equity, and further information is disclosed in the accounting policies and in Notes to the consolidated fi nancial statements. The Group adopted IFRS 3, Business Combinations together with IAS 36(R), Impairment of Assets, and IAS 38(R), Intangible Assets, as of January 1, 2005, re- sulting in a change in the accounting policy for good- will. Until December 31, 2004, goodwill was amortized on a straight line basis over its expected useful life over a period ranging from two to fi ve years and as- sessed for an indication of impairment, periodically. In accordance with the provisions of IFRS 3, the Group ceased amortization of goodwill from January 1, 2005 for all acquisitions made prior to March 31, 2004. Ac- cumulated amortization as of December 31, 2004 has been eliminated with a corresponding decrease in the cost of goodwill. From January 1, 2005, goodwill is as- sessed for impairment annually, and whenever there are indications of impairment. Under the transitional provisions of IFRS 3, this change in accounting policy was effective immediately for acquisitions made after March 31, 2004. Consequent upon the adoption of IAS 21(R), The Effects of Changes in Foreign Exchange Rates, part of the consolidation process. Minority interests are presented separately in arriving at the net profi t and they are shown as a component of shareholders’ equity in the consolidated balance sheet. Profi ts realized in connection with the sale of fi xed assets between the Group and associated companies are eliminated in proportion to share ownership. Such profi ts are deducted from the Group’s equity and fi xed assets and released in the Group accounts over the same period as depreciation is charged. The companies acquired during the fi nancial periods presented have been consolidated from the date on which control of the net assets and operations was transferred to the Group. Similarly the result of a Group company divested during an accounting period is included in the Group accounts only to the date of disposal. Goodwill Acquisitions of companies are accounted for using the purchase method of accounting. Goodwill represents the excess of the purchase cost over the fair value of assets less liabilities of acquired companies. The Group assesses the carrying value of goodwill annually or, more frequently, if events or changes in circumstances indicate that such carrying value may not be recoverable. If such indication exists the recov- erable amount is determined for the cash-generating unit, to which goodwill belongs. This amount is then compared to the carrying amount of the cash-gener- ating unit and an impairment loss is recognized if the recoverable amount is less than the carrying amount. Impairment losses are recognized immediately in the profi t and loss account. Transactions in foreign currencies Transactions in foreign currencies are recorded at the rates of exchange prevailing at the dates of the indi- vidual transactions. For practical reasons, a rate that approximates the actual rate at the date of the transac- tion is often used. At the end of the accounting period, the unsettled balances on foreign currency receivables and liabilities are valued at the rates of exchange prevailing at the year-end. Foreign exchange gains and losses arising from balance sheet items, as well as fair value changes in the related hedging instruments, are reported in Financial Income and Expenses. Foreign Group companies In the consolidated accounts all items in the profi t and loss accounts of foreign subsidiaries are translated into euro at the average foreign exchange rates for the accounting period. The balance sheets of foreign Group companies are translated into euro at the year-end foreign exchange rates with the exception of goodwill arising on the acquisition of a foreign company prior to the adoption of IAS 21 (revised 2004) as of January 1, 2005, which is translated to euro at historical rates. Differences resulting from the transla- tion of profi t and loss account items at the average rate and the balance sheet items at the closing rate are treated as an adjustment affecting consolidated shareholders’ equity. On the disposal of all or part of a foreign Group company by sale, liquidation, repay- ment of share capital or abandonment, the cumulative amount or proportionate share of the translation difference is recognized as income or as expense in the same period in which the gain or loss on disposal is recognized. Fair valuing principles Financial assets and liabilities Under IAS 39(R), the Group classifi es its investments in marketable debt and equity securities and invest- ments in unlisted equity securities into the following categories: held-to-maturity, trading, or available- for-sale depending on the purpose for acquiring the investments as well as ongoing intentions. All invest- ments of the Group are currently classifi ed as avail- able-for-sale. Available-for-sale investments are fair valued by using quoted market rates, discounted cash fl ow analyses and other appropriate valuation models at the balance sheet date. Certain unlisted equities for which fair values cannot be measured reliably are reported at cost less impairment. All purchases and sales of investments are recorded on the trade date, which is the date that the Group commits to purchase or sell the asset. The fair value changes of available-for-sale investments are recognized in shareholders’ equity. When the investment is disposed of, the related accumulated fair value changes are released from Notes to the consolidated fi nancial statement 11 Notes to the consolidated financial statements shareholders’ equity and recognized in the profi t and loss account. The weighted average method is used when determining the cost-basis of publicly listed equities being disposed of. FIFO (First-in First-out) method is used to determine the cost basis of fi xed income securities being disposed of. An impairment is recorded when the carrying amount of an available- for-sale investment is greater than the estimated fair value and there is objective evidence that the asset is impaired. The cumulative net loss relating to that investment is removed from equity and recognized in the profi t and loss account for the period. If, in a subsequent period, the fair value of the investment increases and the increase can be objectively related to an event occurring after the loss was recognized, the loss is reversed, with the amount of the reversal included in the profi t and loss account. The fair values of other fi nancial assets and fi nan- cial liabilities are assumed to approximate their carry- ing values, either because of their short maturities, or their fair values cannot be measured reliably. Derivatives Fair values of forward rate agreements, interest rate options, futures contracts and exchange traded options are calculated based on quoted market rates at the balance sheet date. Interest rate and currency swaps are valued by using discounted cash fl ow analy- ses. The changes in the fair values of these contracts are reported in the profi t and loss account. Fair values of cash settled equity derivatives are calculated by revaluing the contract at year-end quot- ed market rates. Changes in fair value are reported in the profi t and loss account. Forward foreign exchange contracts are valued at the market forward exchange rates. Changes in fair value are measured by comparing these rates with the original contract forward rate. Currency options are valued at the balance sheet date by using the Garman & Kohlhagen option valuation model. Changes in the fair value on these instruments are reported in the profi t and loss account except to the extent they qualify for hedge accounting. Embedded derivatives are identifi ed and monitored in the Group and fair valued at the balance sheet date. In assessing the fair value of embedded derivatives the Group uses a variety of methods, such as option pricing models and discounted cash fl ow analysis, and makes assumptions that are based on market conditions existing at each balance sheet date. The fair value changes are reported in the profi t and loss account. Hedge accounting Hedging of anticipated foreign currency denomi- nated sales and purchases The Group applies hedge accounting for “Qualifying hedges”. Qualifying hedges are those properly docu- mented cash fl ow hedges of the foreign exchange rate risk of future anticipated foreign currency denomi- nated sales and purchases that meet the requirements set out in IAS 39(R). The cash fl ow being hedged must be “highly probable” and must ultimately impact the profi t and loss account. The hedge must be highly ef- fective both prospectively and retrospectively. The Group claims hedge accounting in respect of certain forward foreign exchange contracts and options, or option strategies, which have zero net pre- mium or a net premium paid, and where the critical terms of the bought and sold options within a collar or zero premium structure are the same and where the nominal amount of the sold option component is no greater than that of the bought option. For qualifying foreign exchange forwards the change in fair value that refl ects the change in spot exchange rates is deferred in shareholders’ equity to the extent that the hedge is effective. For qualifying foreign exchange options, or option strategies, the change in intrinsic value is deferred in sharehold- ers’ equity to the extent that the hedge is effective. In all cases the ineffective portion is recognized immediately in the profi t and loss account. Hedging costs, either expressed as the change in fair value that refl ects the change in forward exchange rates less the change in spot exchange rates for forward foreign exchange contracts, or changes in the time value for options, or options strategies, are recognized within other operating income or expenses. Accumulated fair value changes from qualifying hedges are released from shareholders’ equity into the profi t and loss account as adjustments to sales and cost of sales, in the period when the hedged cash fl ow affects the profi t and loss account. If the hedged cash fl ow is no longer expected to take place, all de- ferred gains or losses are released into the profi t and loss account as adjustments to sales and cost of sales, immediately. If the hedged cash fl ow ceases to be highly probable, but is still expected to take place, ac- cumulated gains and losses remain in equity until the hedged cash fl ow affects the profi t and loss account. Changes in the fair value of any derivative instru- ments that do not qualify for hedge accounting under IAS 39(R) are recognized immediately in the profi t and loss account. The fair value changes of derivative instruments that directly relate to normal business operations are recognized within other operating income and expenses. The fair value changes from all other derivative instruments are recognized in fi nancial income and expenses. Foreign currency hedging of net investments The Group also applies hedge accounting for its for- eign currency hedging on net investments. Qualifying hedges are those properly documented hedges of the foreign exchange rate risk of foreign currency-denom- inated net investments that meet the requirements set out in IAS 39(R). The hedge must be effective both prospectively and retrospectively. The Group claims hedge accounting in respect of forward foreign exchange contracts, foreign currency- denominated loans, and options, or option strategies, which have zero net premium or a net premium paid, and where the terms of the bought and sold options within a collar or zero premium structure are the same. For qualifying foreign exchange forwards the change in fair value that refl ects the change in spot exchange rates is deferred in shareholders’ equity. The change in fair value that refl ects the change in for- ward exchange rates less the change in spot exchange rates is recognized in the profi t and loss account within fi nancial income and expenses. For qualify- ing foreign exchange options the change in intrinsic value is deferred in shareholders’ equity. Changes in the time value are at all times taken directly to the profi t and loss account within fi nancial income and expenses. If a foreign currency-denominated loan is used as a hedge, all foreign exchange gains and losses arising from the transaction are recognized in shareholders’ equity. Accumulated fair value changes from qualifying hedges are released from shareholders’ equity into the profi t and loss account only if the legal entity in the given country is sold, liquidated, repays its share capital or is abandoned. Revenue recognition Sales from the majority of the Group are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fi xed or determinable and collectibility is probable. An immaterial part of the revenue from products sold through distribution channels is recognized when the reseller or distributor sells the products to the end users. The Group records reductions to revenue for special pricing agreements, price protection and other volume based discounts. In addition, sales and cost of sales from contracts involving solutions achieved through modifi cation of complex telecommunications equipment are recog- nized on the percentage of completion method when the outcome of the contract can be estimated reliably. This occurs when total contract revenue and the costs to complete the contract can be estimated reliably, it is probable that the economic benefi ts associated with the contract will fl ow to the Group and the stage of contract completion can be measured. When the Group is not able to meet those conditions, the policy is to recognize revenues only equal to costs incurred to date, to the extent that such costs are expected to be recovered. Completion is measured by reference to cost incurred to date as a percentage of estimated total project costs, the cost-to-cost method. The percentage of completion method relies on estimates of total expected contract revenue and costs, as well as dependable measurement of the progress made towards completing a particular project. Recognized revenues and profi ts are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. The cumulative impact of a revision in 12 Nokia in 2005 Notes to the consolidated financial statements estimates is recorded in the period such revisions become likely and estimable. Losses on projects in progress are recognized in the period they become likely and estimable. The Group’s customer contracts may include the provision of separately identifi able components of a single transaction, for example the construction of a network solution and subsequent network mainte- nance services. Accordingly, for these arrangements, revenue recognition requires proper identifi cation of the components of the transaction and evaluation of their commercial effect in order to refl ect the substance of the transaction. If the components are considered separable, revenue is allocated across the identifi able components based upon relative fair values. All the Group’s material revenue streams are recorded according to the above policies. Shipping and handling costs The costs of shipping and distributing products are included in cost of sales. Research and development Research and development costs are expensed as they are incurred, except for certain development costs, which are capitalized when it is probable that a devel- opment project will generate future economic benefi ts, and certain criteria, including commercial and techni- cal feasibility, have been met. Capitalized development costs, comprising direct labor and related overhead, are amortized on a systematic basis over their expected useful lives between two and fi ve years. Capitalized development costs are subject to regular assessments of recoverability based on anticipated future revenues, including the impact of changes in technology. Unamortized capitalized development costs determined to be in excess of their recoverable amounts are expensed immediately. Other intangible assets Expenditures on acquired patents, trademarks and licenses are capitalized and amortized using the straight-line method over their useful lives, but not exceeding 20 years. Where an indication of impair- ment exists, the carrying amount of any intangible asset is assessed and written down to its recoverable amount. Costs of software licenses associated with internal-use software are capitalized. These costs are included within other intangible assets and are amor- tized over a period not to exceed three years. Pensions The Group companies have various pension schemes in accordance with the local conditions and practices in the countries in which they operate. The schemes are generally funded through payments to insurance companies or to trustee-administered funds as deter- mined by periodic actuarial calculations. charged to the profi t and loss account in the period to which the contributions relate. For defi ned benefi t plans, principally the reserved portion of the Finnish TEL system, pension costs are assessed using the projected unit credit method: the cost of providing pensions is charged to the profi t and loss account so as to spread the service cost over the service lives of employees. The pension obligation is measured as the present value of the estimated future cash outfl ows using interest rates on government securities that have terms to maturity approximating the terms of the related liabilities. Actuarial gains and losses outside the corridor are recognized over the average remaining service lives of employees. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the expected useful lives of the assets as follows: Buildings and constructions 20 – 33 years Production machinery, measuring and test equipment 1 – 3 years Other machinery and equipment 3 – 10 years Land and water areas are not depreciated. Maintenance, repairs and renewals are generally charged to expense during the fi nancial period in which they are incurred. However, major renovations are capitalized and included in the carrying amount of the asset when it is probable that future economic benefi ts in excess of the originally assessed standard of performance of the existing asset will fl ow to the Group. Major renovations are depreciated over the remaining useful life of the related asset. Leasehold improvements are depreciated over the lease term or useful life, whatever is shorter. Gains and losses on the disposal of fi xed assets are included in operating profi t/loss. Leases The Group has entered into various operating leases, the payments under which are treated as rentals and charged to the profi t and loss account on a straight- line basis over the lease terms. Inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard cost, which approximates actual cost, on a fi rst in fi rst out (FIFO) basis. Net realizable value is the amount that can be realized from the sale of the inventory in the normal course of business after allowing for the costs of realization. In addition to the cost of materials and direct An allowance is recorded for excess inventory and obsolescence. Accounts receivable Accounts receivable are carried at the original invoice amount to customers less an estimate made for doubtful receivables based on a periodic review of all outstanding amounts, which includes an analysis of historical bad debt, customer concentrations, cus- tomer creditworthiness, current economic trends and changes in our customer payment terms. Bad debts are written off when identifi ed. Cash and cash equivalents Bank and cash consist of cash at bank and in hand. Cash equivalents consist of highly liquid available-for- sale investments purchased with remaining maturi- ties at the date of acquisition of three months or less. Short-term investments The Group considers all highly liquid marketable secu- rities purchased with maturity at acquisition of more than three months as short-term investments. They are included in current available-for-sale investments, liquid assets, in the balance sheet. Borrowings Borrowings are classifi ed as loans and are recognized initially at an amount equal to the proceeds received, net of transaction costs incurred. In subsequent periods, they are stated at amortized cost using the effective yield method; any difference between pro- ceeds (net of transaction costs) and the redemption value is recognized in the profi t and loss account over the period of the borrowings. Loans to customers Loans to customers are recorded at amortized cost. Loans are subject to regular and thorough review as to their collectibility and as to available collateral; in the event that any loan is deemed not fully recoverable, provision is made to refl ect the shortfall between the carrying amount and the present value of the expect- ed cash fl ows. Interest income on loans to customers is accrued monthly on the principal outstanding at the market rate on the date of fi nancing and is included in other operating income. Income taxes Current taxes are based on the results of the Group companies and are calculated according to local tax rules. Deferred tax assets and liabilities are deter- mined, using the liability method, for all temporary differences arising between the tax basis of assets and liabilities and their carrying values for fi nancial reporting purposes. Currently enacted tax rates are used in the determination of deferred income tax. The Group’s contributions to defi ned contribution plans and to multi-employer and insured plans are labor, an appropriate proportion of production over- heads are included in the inventory values. Under this method the Group is required, in rela- tion to an acquisition, to make provision for deferred Notes to the consolidated fi nancial statement 13 Notes to the consolidated financial statements taxes on the difference between the fair values of the net assets acquired and their tax bases. The principal temporary differences arise from intercompany profi t in inventory, warranty and other provisions, untaxed reserves and tax losses carried forward. Deferred tax assets relating to the carry forward of unused tax losses are recognized to the extent that it is probable that future taxable profi t will be available against which the unused tax losses can be utilized. Provisions Provisions are recognized when the Group has a pres- ent legal or constructive obligation as a result of past events, it is probable that an outfl ow of resources will be required to settle the obligation and a reliable es- timate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimburse- ment would be recognized as an asset but only when the reimbursement is virtually certain. The Group recognizes the estimated liability to repair or replace products still under warranty at the balance sheet date. The provision is calculated based on historical experience of the level of repairs and replacements. The Group recognizes the estimated liability for non-cancellable purchase commitments for inventory in excess of forecasted requirements at each balance sheet date. The Group recognizes a provision for the esti- mated future settlements related to asserted and unasserted Intellectual Property Rights (IPR) infringe- ments, based on the probable outcome of each case as of each balance sheet date. The Group recognizes a provision for pension and other social costs on unvested equity instru- ments based upon local statutory law, net of deferred compensation, which is recorded as a component of shareholders equity. The provision is considered as a cash-settled share-based payment and is measured by reference to the fair value of the equity benefi ts pro- vided, and the amount of the provision is adjusted to refl ect the changes in the Nokia share price. The Group recognizes a provision for prior year tax contingencies based upon the estimated future settlement amount at each balance sheet date. Share-based compensation The Group has three types of equity settled share- based compensation schemes for employees: stock options, performance shares and restricted shares. 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. Non-market vesting conditions attached to the performance shares are included in assump- tions about the number of shares that the employee will ultimately receive. On a regular basis the Group reviews the assumptions made and revises its esti- mates of the number of performance shares that are expected to be settled, where necessary. Share-based compensation is recognized as an expense in the profi t and loss account over the service period. When stock options are exercised, the proceeds received net of any transaction costs are credited to share capital (nominal value) and share premium. Dividends Dividends proposed by the Board of Directors are not recorded in the fi nancial statements until they have been approved by the shareholders at the Annual General Meeting. Earnings per share The Group calculates both basic and diluted earnings per share in accordance with IAS 33, Earnings per share, (IAS 33). Under IAS 33, basic earnings per share is computed using the weighted average number of shares outstanding during the period. Diluted earn- ings per share is computed using the weighted aver- age number of shares outstanding during the period plus the dilutive effect of stock options, restricted shares and performance shares outstanding during the period. Use of estimates The preparation of fi nancial statements in conformity with IFRS requires the application of judgment by management in selecting appropriate assumptions for calculating fi nancial estimates, which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Set forth below are areas requiring signifi cant judgment and estimation that may have an impact on reported results and the fi nancial position. Revenue recognition Sales from the majority of the Group are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fi xed or determinable and collectibility is probable. Current sales may ma- terially change if management’s assessment of such criteria was determined to be inaccurate. Revenue from contracts involving solutions achieved through modifi cation of complex tele- communications equipment is recognized on the percentage of completion basis when the outcome of the contract can be estimated reliably. Recog- nized revenues and profi ts are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. Current sales and profi t 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. Customer fi nancing The Group has provided a limited amount of customer fi nancing and agreed extended payment terms with selected customers. Should the actual fi nancial posi- tion of the customers or general economic conditions differ from assumptions, the ultimate collectibility of such fi nancings and trade credits may be required to be re-assessed, which could result in a write-off of these balances and thus negatively impact profi ts in future periods. Allowances for doubtful accounts The Group maintains allowances for doubtful accounts for estimated losses resulting from the subsequent in- ability of customers to make required payments. If the fi nancial conditions of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required in future periods. Inventory-related allowances The Group periodically reviews inventory for excess amounts, obsolescence and declines in market value below cost and records an allowance against the inventory balance for any such declines. These reviews require management to estimate future demand for products. Possible changes in these estimates could result in revisions to the valuation of inventory in future periods. Warranty provisions The Group provides for the estimated cost of product warranties at the time revenue is recognized. The Group’s warranty provision is established based upon best estimates of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. As new products incorporating complex technologies are continuously introduced, and as local laws, regulations and practices may change, changes in these estimates could result in ad- ditional allowances or changes to recorded allowances being required in future periods. Provision for intellectual property rights, or IPR, infringements The Group provides for the estimated future settlements related to asserted and unasserted IPR infringements based on the probable outcome of each infringement. IPR infringement claims can last for varying periods of time, resulting in irregular move- ments in the IPR infringement provision. The ultimate outcome or actual cost of settling an individual infringement may materially vary from estimates. 14 Nokia in 2005 Pensions The determination of pension benefi t obligation and expense for defi ned benefi t pension plans is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions 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 plan assets is invested in equity securities which are subject to equity market volatility. Changes in assumptions may materially affect the pension obligation and future expense. Share-based compensation The Group has various types of equity settled share- based compensation schemes for employees. Fair value of stock options is based on certain assump- tions, including, among others, expected volatility and expected life of the options. Non-market vesting conditions attached to 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. Signifi cant differences in equity market performance, employee option activity and the Group’s projected and actual sales and earnings per share performance, may mate- rially affect future expense. New IFRS standards and revised IAS standards In August 2005, the IASB issued IFRS 7, Financial Instruments: Disclosures, which will supersede all disclosure requirements addressed earlier in IAS 32, Financial Instruments: Recognition and Measurement, and includes a comprehensive set of qualitative and quantitative disclosures on risk exposures from all fi nancial instruments. IFRS 7 is effective for fi scal years beginning on or after January 1, 2007. The Group does not expect the adoption of this standard to have a material impact on the disclosures as it has also in the past disclosed qualitative and quantitative informa- tion on risk exposures. In December 2004, the IASB issued Amendment to IAS 19 Employee Benefi ts-Actuarial Gains and Losses, Group Plans and Disclosures, which introduces the option of an alternative recognition approach for actuarial gains and losses. It also adds new disclosure requirements. As the Group does not intend to change the accounting policy adopted for recognition of ac- tuarial gains and losses, adoption of this amendment will only impact the format and extent of disclosures presented in the accounts. The Group will apply this amendment from annual periods beginning January 1, 2006. Legal contingencies Legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against the Group. Provisions are recorded for pending litigation when it is determined that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherent uncer- tain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates. Capitalized development costs The Group capitalizes certain development costs when it is probable that a development project will generate future economic benefi ts and certain criteria, includ- ing commercial and technical feasibility, have been met. Should a product fail to substantiate its estimated feasibility or life cycle, material development costs may be required to be written off in future periods. Valuation of long-lived and intangible assets and goodwill The Group assesses the carrying value of identifi able intangible assets, long-lived assets and goodwill annually, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Factors that trigger an impairment review include underperformance relative to histori- cal or projected future results, signifi cant changes in the manner of the use of the acquired assets or the strategy for the overall business and signifi cant nega- tive industry or economic trends. The most signifi cant variables in determining cash fl ows are discount rates, terminal values, the number of years on which to base the cash fl ow projections, as well as the assumptions and estimates used to determine the cash infl ows and outfl ows. Amounts estimated could differ materially from what will actually occur in the future. Fair value of derivatives and other fi nancial instruments The fair value of fi nancial instruments that are not traded in an active market (for example, unlisted equities, currency options and embedded derivatives) are determined using valuation techniques. The Group uses judgment to select an appropriate valuation methodology as well as underlying assumptions based on existing market practice and conditions. Changes in these assumptions may cause the Group to recognize impairments or losses in future periods. Deferred taxes Management judgment is required in determining provisions for income taxes, deferred tax assets and liabilities and the extent to which deferred tax as- sets can be recognized. If the fi nal 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 determina- tion is made. Notes to the consolidated financial statements Notes to the consolidated fi nancial statement 15 Notes to the consolidated financial statements 2. Adoption of IFRS 2 and IAS 39(R) The comparative fi gures for 2004 and 2003 have been revised to refl ect the adoption of IFRS 2 and IAS 39(R) and the effects are summarized as follows: Increase in net sales Increase in cost of sales Increase in research and development expenses Increase in selling and marketing expenses Increase in administrative and general expenses Increase (–)/decrease (+) in tax expense Increase (+)/decrease (–) in profit attributable to equity holders of the parent Decrease in accrued expenses Increase in provisions Increase in share issue premium Decrease in fair value and other reserves Decrease in basic earnings per share Decrease in diluted earnings per share 3. Segment information IFRS 2 EURm 2004 IAS 39(R) EURm Total EURm IFRS 2 EURm 2003 IAS 39(R) EURm Total EURm – – – 43 – 12 – 7 2 – 60 – 2 9 94 – 104 – 46 – – – – 13 45 – – – – 56 IFRS 2 EUR – 0.01 – 0.01 2004 IAS 39(R) EUR 0.00 0.00 104 – 46 – 43 – 12 – 7 – 11 – 15 – 2 9 94 – 56 Total EUR – 0.01 – 0.01 – – – 28 – 8 – 5 – – 41 – – 41 – 78 – 88 – – – 2 – 8 – – – – 12 IFRS 2 EUR – 0.01 – 0.01 2003 IAS 39(R) EUR 0.00 0.00 78 – 88 – 28 – 8 – 5 2 – 49 – – 41 – 12 Total EUR – 0.01 – 0.01 Nokia is organized on a worldwide basis into four primary business segments: Mobile Phones; Multi- media; Enterprise Solutions; and Networks. Nokia’s reportable segments represent the strategic business units that offer different products and services for which monthly fi nancial information is provided to the Board. Mobile Phones connects people by providing expanding mobile voice and data capabilities across a wide range of mobile devices. Multimedia brings connected mobile multimedia experiences to consumers in the form of advanced mobile devices and applications. Enterprise Solutions offers businesses and institutions a broad range of products and solutions, including enterprise-grade mobile devices, underlying security infrastructure, software and services. Networks provides network infrastructure, communications and networks service platforms as well as professional services to operators and service providers. In addition to the four business groups, the Group’s organization has two horizontal units to support the mobile device business groups, increase operational effi ciency and competitiveness, and to take advantage of economies of scale: Customer and Market Operations and Technology Platforms. The horizontal groups are not separate reporting entities, but their costs are carried mainly by the mobile device business groups, which comprises of Mobile Phones, Multimedia and Enterprise Solutions, with the balance included in Common Group Functions. The costs and revenues as well as assets and liabilities of the horizontal groups are allocated to the mobile device business groups on a symmetrical basis; with any amounts not so allocated included in Common Group Functions. Common Group Functions consists of common research and general Group functions. The accounting policies of the segments are the same as those described in Note 1. Nokia accounts for intersegment revenues and transfers as if the revenues or transfers were to third parties, that is, at current market prices. Nokia evaluates the performan- ce of its segments and allocates resources to them based on operating profi t. No single customer represents 10 % or more of Group revenues. 16 Nokia in 2005 Notes to the consolidated financial statements 2005, EURm Profit and loss information Mobile Phones Multimedia Enterprise Solutions Networks Total reportable segments Common Group Functions Eliminations Group Net sales to external customers 20 811 5 979 Net sales to other segments Depreciation and amortization Impairment and customer fi nance charges Operating profi t/loss Share of results of associated companies Balance sheet information Capital expenditures 1 Segment assets 2 of which: – 247 – 3 598 – 273 4 355 2 83 36 836 – 77 1 374 Investments in associated companies – – 839 22 22 – – 258 – 24 202 – 6 556 34 185 1 241 – 855 – 102 3 437 25 593 36 5 031 – 476 9 368 6 – 6 119 30 – 392 10 131 1 135 – – 193 – 19 – 53 Unallocated assets 3 Total assets Segment liabilities 4 Unallocated liabilities 5 Total liabilities 2004, As revised, EURm Profit and loss information 4 772 1 505 315 1 607 8 199 241 – 156 Net sales to external customers 18 443 3 653 Net sales to other segments Depreciation and amortization Impairment and customer fi nance charges Operating profi t/loss Share of results of associated companies Balance sheet information Capital expenditures 1 Segment assets 2 of which: 78 306 – 3 786 – 279 3 758 Investments in associated companies – 23 77 – 175 – 67 787 – 815 24 23 – – 210 – 18 210 – 6 431 29 342 – 314 115 884 – 91 3 055 125 720 115 4 635 – 455 7 810 29 – 29 148 11 – 309 – 26 93 1 142 – – 200 – 96 – 12 Unallocated assets 3 Total assets Segment liabilities 4 Unallocated liabilities 5 Total liabilities 2003, As revised, EURm Profit and loss information 4 114 934 271 1 574 6 893 170 – 12 Net sales to external customers 20 851 2 523 Net sales to other segments Depreciation and amortization Impairment and customer fi nance charges Operating profi t/loss Share of results of associated companies 125 378 – 5 893 – 8 55 – – 196 – 1 Including goodwill and capitalized development costs, capital expenditures in 2005 amount to EUR 760 million (EUR 649 million in 2004). The goodwill and capitalized development costs consist of EUR 31 million in 2005 (EUR 11 million in 2004) for Mobile Phones, EUR 16 million in 2005 (EUR 3 million in 2004) for Multimedia, EUR 5 million in 2005 (EUR 1 million in 2004) for Enterprise Solu- tions, EUR 93 million in 2005 (EUR 83 million in 2004) for Networks and EUR 8 million in 2005 (EUR 3 million in 2004) for Common Group Functions. 2 Comprises intangible assets, property, plant and equipment, investments, inventories and accounts receivable as well as prepaid expenses and accrued income except those related to interest and taxes. 513 27 10 – – 143 – 3 4 5 5 635 – 520 200 – 216 – 29 522 160 963 200 5 338 – 11 – 11 175 40 – 378 – 18 – 149 Unallocated assets include cash and other liquid assets, available-for-sale investments, long-term loans receivable and other financial assets as well as interest and tax related prepaid expenses and accrued income. Tax related prepaid expenses and accrued income, and deferred tax assets amount to EUR 1 127 million in 2005 (EUR 826 million in 2004). Comprises accounts payable, accrued expenses and provisions except those related to interest and taxes. Unallocated liabilities include non-current liabilities and short-term borrowings as well as interest and tax related prepaid income, accrued expenses and provisions. Tax related prepaid income and accrued expenses, and deferred tax liabilities amount to EUR 433 million in 2005 (EUR 246 million in 2004). Notes to the consolidated fi nancial statement 17 34 191 – 712 66 4 639 10 607 10 450 193 11 848 22 298 8 284 1 654 9 938 29 371 – 868 126 4 326 – 26 548 8 940 200 13 729 22 669 7 051 1 219 8 270 29 533 – 1 138 240 4 960 – 18 Notes to the consolidated financial statements Net sales to external customers by geographic area by location of customer Finland China USA Great Britain India Germany Other Total Segment assets by geographic area Finland China USA Great Britain India Germany Other Total Capital expenditures by market area Finland China USA Great Britain India Germany Other Total 1 2005 EURm 331 3 403 2 743 2 405 2 022 1 982 21 305 34 191 2005 EURm 3 619 1 120 1 437 437 416 390 3 031 10 450 2005 EURm 259 93 74 12 31 26 112 607 2004 As revised EURm 2003 As revised EURm 347 2 023 4 488 2 711 1 064 2 297 16 603 29 533 351 2 678 3 430 2 269 1 369 1 730 17 544 29 371 2004 EURm 3 429 880 1 025 502 225 353 2 526 8 940 2004 EURm 2003 EURm 216 57 80 5 3 20 167 548 160 53 49 9 2 17 142 432 1 Including goodwill and capitalized development costs, capital expenditures amount to EUR 760 million in 2005 (EUR 649 million in 2004 and EUR 670 million in 2003). The goodwill and capitalized development costs in 2005 consist of EUR 0 million in USA (EUR 0 million in USA in 2004 and EUR 20 million in USA in 2003) and EUR 153 million in other areas (EUR 101 million in 2004 and EUR 218 million in 2003). 4. Percentage of completion Contract sales recognized under the cost-to-cost method of percentage of comple- tion accounting were EUR 5 520 million in 2005 (EUR 5 197 million in 2004 and EUR 4 807 million in 2003). Billings in advance of contract revenues, included in prepaid income under accrued expenses, were EUR 148 million at December 31, 2005 (EUR 185 million in 2004 and EUR 195 million in 2003). Contract revenues recorded prior to billings, included in accounts receivable, were EUR 0 million at December 31, 2005 (EUR 80 million in 2004 and EUR 665 million in 2003). 5. Personnel expenses EURm Wages and salaries Share-based compensation expense, total Pension expenses, net Other social expenses Personnel expenses as per profi t and loss account 2005 2004 As revised 2003 As revised 3 127 104 252 394 2 805 62 253 372 2 501 41 184 341 3 877 3 492 3 067 Share-based compensation expense includes pension and other social costs of EUR 9 million in 2005 (EUR 2 million in 2004 and EUR 0 million in 2003) based upon the related employee benefi t charge recognized during the year. The net of tax share-based compensation expense amounted to EUR 82 million in 2005 (EUR 60 million in 2004 and EUR 41 million in 2003). Pension expenses, comprised of multi-employer, insured and defi ned cont- ribution plans were EUR 206 million in 2005 (EUR 192 million in 2004 and EUR 146 million in 2003). Average personnel Mobile Phones Multimedia Enterprise Solutions Networks Common Group Functions Nokia Group 2005 EURm 2 647 2 750 2 185 17 676 31 638 56 896 2004 EURm 2 853 2 851 2 167 15 463 30 177 53 511 2003 EURm 51 605 6. Pensions The most signifi cant pension plans are in Finland and are comprised of the Finnish state TEL system with benefi ts directly linked to employee earnings. These benefi ts are fi nanced in two distinct portions. The majority of benefi ts are fi nanced by con- tributions to a central pool with the majority of the contributions being used to pay current benefi ts. The other part comprises reserved benefi ts which are pre-funded through the trustee-administered Nokia Pension Foundation. The pooled portion of the TEL system is accounted for as a defi ned contribution plan and the reserved portion as a defi ned benefi t plan. The foreign plans include both defi ned contribu- tion and defi ned benefi t plans. Effective on January 1, 2005, the Finnish TEL system was reformed. The most signifi cant change that has an impact on the Group’s future fi nancial statements is that pensions accumulated after 2005 are calculated on the earnings during the entire working career, not only on the basis of the last few years of employment as provided by the old rules. An increase to the rate at which pensions accrue led to a past service cost of EUR 5 million in 2004, which will be recognized over employees’ future working life. As a result of the changes in the TEL system, which increased the Group’s obliga- tion in respect of ex-employees and reduced the obligation in respect of recent rec- ruits, a change in the liability has been recognised to cover future disability pensions. In 2005, to compensate the Group for the additional liability in respect of ex-emplo- yees assets of EUR 24 million were transferred from the pooled part of the pension system to cover future disability pensions inside Nokia Pension Foundation. As this transfer of assets is effectively a reduction of the obligation to the pooled premium, it has been accounted for as a credit to the profi t and loss account during 2005. 18 Nokia in 2005 Notes to the consolidated financial statements The amounts recognized in the balance sheet relating to single employer defi ned benefi t schemes are as follows: The prepaid pension cost above is made up of a prepayment of EUR 207 million (EUR 202 million in 2004) and an accrual of EUR 80 million (EUR 76 million in 2004). 2005 2004 EUR 6 million in 2005 (EUR 4 million in 2004). The domestic pension plans’ assets include Nokia securities with fair values of EURm Fair value of plan assets Present value of obligations Surplus/(Defi cit) Unrecognized net actuarial losses Unrecognized past service cost Prepaid/(Accrued) pension cost in balance sheet Domestic plans Foreign plans Domestic plans Foreign plans 904 – 890 14 128 3 372 – 495 – 123 105 – 768 – 727 41 93 5 303 – 398 – 95 82 – 145 – 18 139 – 13 Present value of obligations include EUR 35 million (EUR 36 million in 2004) of unfunded obligations. The amounts recognized in the profi t and loss account are as follows: EURm 2005 2004 2003 Current service cost Interest cost Expected return on plan assets Net actuarial losses recognized in year Past service cost gain (–) loss (+) Transfer from central pool Curtailment Total, included in personnel expenses 69 58 – 64 9 1 – 24 – 3 46 62 56 – 56 – – 1 – – 61 54 46 – 55 3 – – – 10 38 Movements in prepaid pension costs recognized in the balance sheet are as follows: The foreign pension plan assets include a self investment through a loan pro- vided to Nokia by the Group’s German pension fund of EUR 62 million (EUR 62 million in 2004). See Note 34. The actual return on plan assets was EUR 147 million in 2005 (EUR 83 million in 2004). 7. Advertising and promotional expenses The Group expenses advertising and promotion costs as incurred. Advertising and promotional expenses were EUR 1 481 million in 2005 (EUR 1 144 million in 2004 and EUR 1 414 million in 2003). 8. Other operating income and expenses Other operating income for 2005 includes a gain of EUR 61 million relating to the divestiture of the Group’s Tetra business, a EUR 18 million gain related to the partial sale of a minority investment (see Note 16) and a EUR 45 million gain related to qualifying sales and leaseback transactions for real estate. In 2005, Enterprise Solu- tions recorded a charge of EUR 29 million for personnel expenses and other costs in connection with a restructuring taken in light of general downturn in market conditions, which were fully paid during 2005. Other operating income for 2004 includes a gain of EUR 160 million represent- ing the premium return under a multi-line, multi-year insurance program, which expired during 2004. The return was due to our low claims experience during the policy period. Other operating income for 2003 includes a gain of EUR 56 million on the sale of the remaining shares of Nokian Tyres Ltd. In 2003, Networks recorded a charge of EUR 80 million for personnel expenses and other costs in connection with the restructuring taken in light of general downturn in market conditions, of which EUR 15 million was paid during 2003. EURm Prepaid pension costs at beginning of year Net income (expense) recognized in the profi t and loss account Contributions paid Foreign exchange Prepaid pension costs at end of year 2005 2004 126 79 – 46 46 1 127 * – 61 108 – 126 * * Included within prepaid expenses and accrued income. The principal actuarial weighted average assumptions used were as follows: % Domestic Foreign Domestic Foreign 2005 2004 Discount rate for determining present values Expected long-term rate of return on plan assets Annual rate of increase in future compensation levels Pension increases 4.20 4.55 4.75 5.00 4.44 5.49 5.00 5.31 3.50 2.00 3.91 2.55 3.50 2.00 3.82 2.38 Notes to the consolidated fi nancial statement 19 Notes to the consolidated financial statements 9. Impairment 2005, EURm Impairment of available-for-sale investments Total, net 2004, EURm Impairment of available-for-sale investments Impairment of capitalized development costs Total, net 2003, EURm Customer fi nance impairment charges, net of reversals Impairment of goodwill Impairment of available-for-sale investments Impairment of capitalized development costs Total, net Mobile Phones Multimedia Enterprise Solutions Networks Common Group Functions Group – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 115 115 – 226 151 – 275 200 30 30 11 – 11 – – 27 – 27 30 30 11 115 126 – 226 151 27 275 227 During 2004, the Group recorded an impairment charge of EUR 65 million of capitalized development costs due to the abandonment of FlexiGateway and Horizontal Technology modules. In addition, an impairment charge of EUR 50 million was recorded on WCDMA radio access network program due to changes in market outlook. The impairment loss was determined as the difference between the carrying amount of the asset and its recoverable amount. The recoverable amount for WCDMA radio access network was derived from the discounted cash fl ow projec- tions, which cover the estimated life of the WCDMA radio access network current technology, using a discount rate of 15 %. The impaired technologies were part of Networks business group. Relating to restructuring at Networks, the Group recorded a EUR 206 million impairment of capitalized development costs in 2003 relating to the WCDMA 3G systems. In 2003, Nokia also recorded a EUR 26 million and EUR 43 million impairment of capitalized develop- ment costs relating to FlexiGateway and Metrosite systems, respectively. The impairment losses were determined as the difference between the carrying amount of the asset and its recoverable amount. In determining the recoverable amount, the Group calcu- lated the present value of estimated discounted future cash fl ows, using a 15 % discount rate for WCDMA and FlexiGateway and 12 % discount rate for Metrosite, expected to arise from the continuing use of the asset and from its disposal at the end of its useful life. The impairment charge recorded in 2002 relating to Mobilcom was substantially reversed in 2003 by EUR 226 million as a result of the company receiving repayment of the Mobilcom loans receivables in the form of subordinated convertible perpetual bonds of France Telecom. See Notes 12, 17 and 22. The Group has evaluated the carrying value of goodwill arising from certain acquisitions by deter- mining if the carrying values of the net assets of the cash generating unit to which the goodwill belongs exceeds the recoverable amounts of that unit. In 2003, in the Networks business, the Group recorded an impairment charge of EUR 151 million on goodwill re- lated to the acquisition of Amber Networks. The recov- erable amount for Amber Networks was derived from the value in use discounted cash fl ow projections, which cover the estimated life of the Amber platform technology, using a discount rate of 15 %. The impair- ment was a result of signifi cant declines in the market outlook for products under development. During 2005 the Group’s investment in certain equity securities suffered a permanent decline in fair value resulting in an impairment charge of EUR 30 million relating to non-current available-for-sale investments (EUR 11 million in 2004 and EUR 27 million in 2003). 20 Nokia in 2005 EURm 2005 2004 2003 Other 10. Acquisitions In 2003, the Group made three minor purchase acquisitions for a total consideration of EUR 38 million, of which EUR 20 million was in cash and EUR 18 million in non-cash consideration. 11. Depreciation and amortization Depreciation and amortization by function EURm 2005 2004 Cost of sales Research and development Selling and marketing Administrative and general Other operating expenses Amortization of goodwill Total 242 349 9 99 13 – 712 196 431 14 123 8 96 868 12. Financial income and expenses Income from available-for-sale investments Dividend income Interest income Other fi nancial income Foreign exchange gains and losses Interest expense Other fi nancial expenses Total 1 295 77 – 11 – 18 – 22 322 22 299 178 8 – 22 – 80 405 24 323 38 32 – 25 – 40 352 During 2005, Nokia sold the remaining holdings in the subordinated convertible perpetual bonds issued by France Telecom. As a result, the Group booked a total net gain of EUR 57 million (EUR 106 million in 2004) in other fi nancial income, of which EUR 53 million (EUR 104 million in 2004) was recycled from Fair Value and Other Reserves. See Notes 17 and 22. 13. Income taxes EURm Income tax expense Current tax Deferred tax Total Finland Other countries Total 2005 2004 As revised 2003 As revised – 1 262 – 19 – 1 281 – 759 – 522 – 1 281 – 1 403 – 43 – 1 446 – 1 128 – 318 – 1 446 – 1 684 – 13 – 1 697 – 1 114 – 583 – 1 697 Notes to the consolidated financial statements The differences between income tax expense computed at statutory rates (in Finland 26 % in 2005 and 29 % in 2004 and 2003) and income taxes recognised in the consolidated income statement is reconciled as follows at December 31: EURm 2005 2004 As revised 2003 As revised Income tax expense at statutory rate 1 295 1 372 1 555 2003 214 537 23 162 43 159 1 138 Amortization of goodwill Impairment of goodwill Provisions without income tax benefi t/expense Taxes for prior years Taxes on foreign subsidiaries’ profi ts in excess of (lower than) income taxes at statutory rates Operating losses with no current tax benefi t Net increase in provisions Change in deferred tax rate Deferred tax liability on undistributed earnings Adoption of IAS 39(R) and IFRS 2 Income tax expense – – 11 1 28 – – – 34 46 58 – 56 – 30 – 130 – 77 – 22 – 8 – – 26 1 281 – 67 26 60 11 46 8 14 – – – 2 39 1 446 1 697 At December 31, 2005, the Group had loss carry forwards, primarily attributable to foreign subsidiaries of EUR 92 million (EUR 105 million in 2004 and EUR 186 million in 2003), most of which will expire between 2006 and 2023. In the beginning of 2005, the corporate tax rate in Finland was reduced from 29 % to 26%. The impact of the change on the Profi t and loss account through change in deferred taxes in 2004 was EUR 26 million. In 2005, there was no impact on the Profi t and loss account through a change in deferred tax. Income taxes include a tax benefi t from a tax refund from previous years of EUR 48 million in 2005. Certain of the Group companies’ income tax returns for periods ranging from 1998 through 2004 are under examination by tax authorities. The Group does not believe that any signifi cant additional taxes in excess of those already provided for will arise as a result of the examinations. During 2004, the Group analyzed its future foreign investment plans with re- spect to certain foreign investments. As a result of this analysis, the Group conclud- ed that it could no longer represent that all foreign earnings may be permanently reinvested. Accordingly, the Group recorded the recognition of a EUR 60 million deferred tax liability in 2004. In 2005, the deferred tax liability was EUR 68 million. Notes to the consolidated fi nancial statement 21 Notes to the consolidated financial statements 14. Intangible assets EURm 2005 2004 EURm 2005 2004 Buildings and constructions Acquisition cost January 1 Translation differences Additions during the period Disposals during the period Accumulated acquisition cost December 31 Accumulated depreciation January 1 Translation differences Disposals during the period Depreciation for the period Accumulated depreciation December 31 Net book value January 1 Net book value December 31 Machinery and equipment Acquisition cost January 1 Translation differences Additions during the period Disposals during the period Accumulated acquisition cost December 31 Accumulated depreciation January 1 Translation differences Disposals during the period Depreciation for the period Accumulated depreciation December 31 Net book value January 1 Net book value December 31 Other tangible assets Acquisition cost January 1 Translation differences Additions during the period Disposals during the period Accumulated acquisition cost December 31 Accumulated depreciation January 1 Translation differences Disposals during the period Depreciation for the period Accumulated depreciation December 31 Net book value January 1 Net book value December 31 Advance payments and fixed assets under construction Net carrying amount January 1 Additions Disposals Transfers to: Other intangible assets Buildings and constructions Machinery and equipment Translation differences Net carrying amount December 31 910 16 29 – 90 865 – 220 – 1 12 – 35 – 244 690 621 3 340 149 470 – 224 3 735 – 2 650 – 111 217 – 440 – 2 984 690 751 21 1 1 – 6 17 – 11 1 6 – 2 – 6 10 11 40 105 – – 3 – 4 – 20 2 120 887 – 5 38 – 10 910 – 196 2 6 – 32 – 220 691 690 3 223 -44 438 – 277 3 340 – 2 521 31 266 – 426 – 2 650 702 690 18 2 1 – 21 – 6 – 3 – – 2 – 11 12 10 53 25 – – 1 – 8 – 30 1 40 Total property, plant and equipment 1 585 1 534 Capitalized development costs Acquisition cost January 1 Translation differences Additions during the period Disposals during the period Accumulated acquisition cost December 31 Accumulated depreciation January 1 Translation differences Disposals during the period Depreciation for the period Accumulated depreciation December 31 Net book value January 1 Net book value December 31 Goodwill Acquisition cost January 1 Transfer of accumulated depreciation Translation differences Additions during the period Disposals during the period Accumulated acquisition cost December 31 Accumulated depreciation January 1 Transfer of accumulated depreciation Translation differences Disposals during the period Depreciation for the period Accumulated depreciation December 31 Net book value January 1 Net book value December 31 Other intangible assets Acquisition cost January 1 Translation differences Additions during the period Disposals during the period Accumulated acquisition cost December 31 Accumulated depreciation January 1 Translation differences Disposals during the period Depreciation for the period Accumulated depreciation December 31 Net book value January 1 Net book value December 31 1 322 – 153 – 30 1 445 – 1 044 – 30 – 171 – 1 185 278 260 1 298 – 1 208 – – – 90 – 1 208 1 208 – – – – 90 90 631 3 59 – 17 676 – 422 7 14 – 64 – 465 209 211 1 336 – 101 – 115 1 322 -799 – – – 245 – 1 044 537 278 1 298 – – – – 1 298 – 1 112 – – – – 96 – 1 208 186 90 548 4 86 – 7 631 – 363 2 7 – 68 – 422 185 209 15. Property, plant and equipment EURm 2005 2004 Land and water areas Acquisition cost January 1 Translation differences Additions during the period Disposals during the period Accumulated acquisition cost December 31 Net book value January 1 Net book value December 31 104 1 5 – 28 82 104 82 108 – 1 – 5 104 108 104 22 Nokia in 2005 16. Investments in associated companies EURm 2005 2004 Net carrying amount January 1 Additions Deductions Share of results Translation differences Other movements Net carrying amount December 31 200 12 – 17 10 8 – 20 193 76 150 – – 26 1 – 1 200 In 2005, the Group disposed part of its 36.2 % minority holding in Aircom Ltd. result- ing to a holding of 10 %. The gain on the sale recorded in other operating income was EUR 18 million. The Group’s remaining 10 % holding in Aircom shares is recorded as a non-current available-for-sale investment. In 2004, the Group increased its ownership in Symbian from 32.2 % to 47.9 % by acquiring part of the shares of Symbian owned by Psion for EUR 102 million (GBP 70 million). EUR 68 million (GBP 47 million) of the total acquisition cost was paid in cash and the remaining purchase price is considered as contingent consideration to be paid in 2005 and 2006. The Group also participated in a rights issue to raise EUR 73 million (GBP 50 million) additional funding to Symbian. The issue was pro rata to existing shareholders. Shareholdings in associated companies are comprised of investments in un- listed companies in all periods presented. 17. Available-for-sale investments Notes to the consolidated financial statements 18. Long-term loans receivable Long-term loans receivable, consisting of loans made to suppliers and to customers principally to support their fi nancing of network infrastructure and services or working capital, net of allowances and write-offs amounts (Note 9), are repayable as follows: EURm Under 1 year Between 1 and 2 years Between 2 and 5 years Over 5 years 19. Inventories EURm Raw materials, supplies and other Work in progress Finished goods Total 2005 2004 56 – 7 – 63 – – – – – 2005 361 685 622 1 668 2004 326 477 502 1 305 20. Receivables and prepaids Accounts receivable include EUR 166 million (EUR 118 million in 2004) due more than 12 months after the balance sheet date. Prepaid expenses and accrued income consists of VAT and other tax receivables, EURm Fair value at January 1 Deductions, net Fair value gains (losses) Impairment charges (Note 9) Fair value at December 31 Non-current Current Current, liquid assets Current, cash equivalents 2005 2004 prepaid pension costs, accrued interest income and other accrued income, but no amounts which are individually signifi cant. 10 876 – 2 227 – 28 – 30 8 591 246 – 6 852 1 493 11 088 – 221 20 – 11 10 876 169 255 9 085 1 367 Available-for-sale investments, comprising marketable debt and equity securities and investments in unlisted equity shares, are fair valued, except in the case of certain unlisted equities, where the fair value cannot be measured reliably. Such unlisted equities are carried at cost, less impairment (EUR 82 million in 2005 and EUR 54 million in 2004). Fair value for equity investments traded in active markets and for unlisted equities, where the fair value can be measured reliably, was EUR 165 million in 2005 and EUR 115 million in 2004. Fair value for equity investments traded in active markets is determined by using exchange quoted bid prices. For other investments, fair value is estimated by using the current market value of similar instruments or by reference to the discounted cash fl ows of the underlying net as- sets. Gains and losses arising from the change in the fair value of available-for-sale investments are recognized directly in Fair value and Other Reserves. Available-for-sale investments comprise: (1) highly liquid, interest-bearing investments with maturities at acquisition of longer than 3 months, which are regarded as current available-for-sale investments, liquid assets, (2) similar types of investments as in category (1), but with maturities at acquisition of less than 3 months, which are regarded as current available-for-sale investments, cash equiva- lents. The remaining part of the available-for-sale investments portfolio is classifi ed as non-current. See Note 38 for details of these investments. Notes to the consolidated fi nancial statement 23 Notes to the consolidated financial statements 21. Valuation and qualifying accounts Allowances on assets to which they apply: Balance at beginning of year EURm Charged to cost and expenses EURm Deductions 1 EURm Balance at end of year EURm 2005 Allowance for doubtful accounts Excess and obsolete inventory 2004 Allowance for doubtful accounts Excess and obsolete inventory 2003 Allowance for doubtful accounts Excess and obsolete inventory 1 Deductions include utilization and releases of the allowances. 22. Fair value and other reserves 361 172 367 188 300 290 80 376 155 308 228 229 – 160 – 249 – 161 – 324 – 161 – 331 281 299 361 172 367 188 Balance at December 31, 2002, As revised 2 0 2 – 13 – 16 – 29 – 11 – 16 – 27 Hedging reserve, EURm Available-for-sale investments, EURm Total, EURm Gross Tax Net Gross Tax Net Gross Tax Net Cash flow hedges (revised): Fair value gains/losses in period Available-for-sale investments: Net fair value gains/losses Transfer to profit and loss account on impairment Transfer of fair value gains to profit and loss account on disposal Transfer of fair value losses to profit and loss account on disposal Balance at December 31, 2003, As revised Cash flow hedges (revised): Fair value gains/losses in period Available-for-sale investments: Net fair value gains/losses Transfer to profit and loss account on impairment Transfer of fair value gains to profit and loss account on disposal Transfer of fair value losses to profit and loss account on disposal Balance at December 31, 2004, As revised Cash flow hedges: Fair value gains/losses in period Available-for-sale investments: Net fair value gains/losses Transfer to profit and loss account on impairment Transfer of fair value gains to profit and loss account on disposal Transfer of fair value losses to profit and loss account on disposal Balance at December 31, 2005 12 – – – – 14 – – – – – 14 – 2 – – – – – 2 – 1 – – – – – 3 10 – – – – 12 – 1 – – – – 11 – 177 45 – 132 – – – – – 163 – – – – 42 – – – – – 121 – – – 12 – 2 10 110 27 – 84 43 83 – 18 11 – 105 – 7 – – 69 9 – 5 2 – 56 – 12 – 20 – 6 – 14 – – 1 – 10 – – 5 – 6 – – – 1 98 27 – 64 37 69 – 17 11 – 95 – 2 110 27 – 84 43 97 – 12 – 20 – 6 – 16 98 27 – 64 37 80 – – 1 – 1 18 11 – 105 – 21 – 1 – 10 – – 8 17 11 – 95 – 13 – – 177 45 – 132 – 63 9 – 5 2 – 55 – 69 9 – 5 2 – 219 6 – – – 43 – 63 9 – 5 2 – 176 24 Nokia in 2005 Notes to the consolidated financial statements Following the changes in IFRS on hedge accounting rules IAS 39(R) effective from January 1, 2005, the Group has revised its method of hedging foreign exchange risks to ensure hedge accounting treat- ment under the new rules. As IAS 39(R) changes are retrospective for the Group as an existing IFRS user, the reserves of cash fl ow hedges recorded in equity at the end of 2003 and 2004, that would not qualify for hedge accounting under IAS 39(R), are reclassifi ed to profi t and loss account, which impacts on the closing balances of cash fl ow hedge reserves. The retrospec- tive implementation of this change increased 2004 and 2003 net sales by EUR 104 million and EUR 78 mil- lion, respectively, and increased 2004 operating profi t by EUR 58 million and decreased 2003 operating profi t by EUR 10 million. More information on the adoption of IAS 39(R) is available in Note 1 and Note 2. In order to ensure that amounts deferred in the cash fl ow hedging reserve represent only the effective portion of gains and losses on properly designated hedges of future transactions that remain highly prob- able at the balance sheet date, Nokia has adopted a process under which all derivative gains and losses are initially recognized in the profi t and loss account. The appropriate reserve balance is calculated at the end of each period and posted to the Hedging Reserve. The Group continuously reviews the underlying cash fl ows and the hedges allocated thereto, to ensure that the amounts transferred to the Hedging Reserve during the year ended December 31, 2005 and 2004 do not include gains/losses on forward exchange contracts that have been designated to hedge fore- casted sales or purchases that are no longer expected to occur. Because of the number of transactions undertaken during each period and the process used to calculate the reserve balance, separate disclosure of the transfers of gains and losses to and from the reserve would be impractical. All of the net fair value gains or losses recorded in the Fair value and other reserve at December 31, 2005 on open forward foreign exchange contracts which hedge anticipated future foreign currency sales or purchases are transferred from the Hedging Reserve to the profi t and loss account when the forecasted foreign currency cash fl ows occur, at various dates up to 1 year from the balance sheet date. 23. The shares of the Parent Company See Note 15 to the fi nancial statements of the Parent Company. 24. Share-based payment The Group has several equity based incentive programs for employees, in which management also participates. The programs include performance share plans, stock option plans and restricted share plans. The equity-based incentive grants are generally forfeited, if the employment relationship with the Group terminates, and they are conditional upon the fulfi llment of the performance and such other condi- tions, as determined in the relevant plan rules. Stock options The Group’s outstanding stock option plans currently include the so called “Global plans” launched in 2001, 2003 and 2005. These plans have been approved by the Annual General Meeting in the year of the launch of the plan. Under these plans, each stock option entitles the holder to subscribe for one new Nokia share with a par value of EUR 0.06 each. In the 2001 stock option plan the stock options are transferable and the stock options under the 2003 and 2005 plans are non-trans- ferable by the participants. All of the stock options have a quarterly staggered vesting schedule, as speci- fi ed in the table below. The exercise prices are deter- mined at the time of the grant, on a quarterly basis equalling the trade volume weighted average price of the Nokia share on the Helsinki Stock Exchange during the trading days of the fi rst whole week of the second month (i.e. February, May, August or November) of the respective calendar quarter, when the sub-category of the stock option is denominated. The exercises based on the stock options issued under the 2001, 2003 and 2005 stock option plans are settled with newly issued shares which will entitle the holder to a dividend for the fi nancial year in which the subscription occurs. Other shareholder rights com- mence on the date on which the shares subscribed for are registered with the Finnish Trade Register. Pursuant to the stock options issued, an ag- gregate maximum number of 144 495 187 new shares were authorized for subscription representing EUR 8 669 711 of the share capital and approximately 3 % of the total number of votes on December 31, 2005. During 2005 the exercise of 125 240 options resulted in the issuance of 125 240 new shares and an increase of the share capital of the Group by EUR 7 514.40. There were no other stock options or convertible bonds outstanding as of December 31, 2005, which upon exercise would result in an increase of the share capital of the parent company. Outstanding stock option plans of the Group, December 31, 2005 Exercise period Number of Total participants Plan (Year of launch) plan size (approx.) (Sub)category Vesting status (as percentage of total number Option of stock options outstanding) 2001 1, 2 102 869 000 30 000 2003 2 33 452 000 20 000 2005 2 2001A+B 2001C3Q/01 2001C4Q/01 2001C1Q/02 2001C3Q/02 2001C4Q/02 2002A+B 2003 2Q 2003 3Q 2003 4Q 2004 2Q 2004 3Q 2004 4Q 2005 2Q 2005 3Q 2005 4Q 100.00 100.00 93.75 87.50 75.00 68.75 81.25 56.25 50.00 43.75 31.25 25.00 0.00 0.00 0.00 0.00 8 174 000 4 000 1 2 The stock options under the 2001 plan are listed on the Helsinki Stock Exchange. The Group’s current stock option plans (the so called “Global plans”) have a vesting schedule with a 25 % vesting 1 year after grant, and quarterly vesting thereafter, each representing 6.25 % of the total grant. The grants vest fully in 4 years. First vest date Last vest date Expiry date July 1, 2002 July 1, 2005 December 31, 2006 October 1, 2002 October 3, 2005 December 31, 2006 January 1, 2003 January 2, 2006 December 31, 2006 April 1, 2003 April 3, 2006 December 31, 2007 October 1, 2003 October 2, 2006 December 31, 2007 January 1, 2004 January 2, 2007 December 31, 2007 July 1, 2003 July 3, 2006 December 31, 2007 July 1, 2004 October 1, 2004 January 3, 2005 July 1, 2005 October 3, 2005 January 2, 2006 July 2, 2007 October 1, 2007 January 2, 2008 July 1, 2008 October 1, 2008 January 2, 2009 December 31, 2008 December 31, 2008 December 31, 2008 December 31, 2009 December 31, 2009 December 31, 2009 July 3, 2006 October 2, 2006 January 2, 2007 July 1, 2009 October 1, 2009 January 1, 2010 December 31, 2010 December 31, 2010 December 31, 2010 Exercise price/ share EUR 36.75 20.61 26.67 26.06 12.99 16.86 17.89 14.95 12.71 15.05 11.79 9.44 12.35 12.79 13.09 14.48 Notes to the consolidated fi nancial statement 25 Notes to the consolidated financial statements Other employee stock option plans In addition to the plans discussed above, the Group has minor stock option plans for the Group’s employ- ees in the U.S. and Canada which do not result in an increase of the share capital of the Group and in which holders receive Nokia ADSs. The plans are settled with Nokia’s existing shares, which are converted into ADS’s. On the basis of these stock option plans the Group had 1.2 million stock options outstanding on December 31, 2005. Each stock option entitles the holder to receive the same amount of Nokia ADSs. The average exercise price of stock options under these plans is USD 25.36. These stock options are included in the table below. Treasury shares are acquired by the Group to meet its obligations under employee stock compensation plans in the U.S. and Canada. When treasury shares are issued on exercise of stock options any gain or loss is recognized in share issue premium. Number of shares Weighted average Weighted average Aggregate intrinsic value, EURm exercise price, EUR share price, EUR 221 443 235 31 098 505 7 700 791 5 847 332 238 993 617 7 172 424 781 338 4 733 995 97 693 392 142 957 316 8 552 160 724 796 5 052 794 145 731 886 148 150 370 83 667 122 112 095 407 12.57 12.49 13.42 28.81 14.94 3.97 25.23 27.90 11.88 8.33 19.55 33.99 23.29 12.82 10.94 17.86 22.97 31.88 26.18 25.33 106 105 4 61 18 12 17 Total stock options outstanding Shares under option at December 31, 2002 Granted 1 Exercised Forfeited Shares under option at December 31, 2003 Granted Exercised Forfeited Expired Shares under option at December 31, 2004 Granted Exercised Forfeited Shares under option at December 31, 2005 Options exercisable at December 31, 2003 (shares) Options exercisable at December 31, 2004 (shares) Options exercisable at December 31, 2005 (shares) 1 Includes options converted in acquisitions. The weighted average grant date fair value per option granted was EUR 2.45 in 2005, EUR 2.59 in 2004 and EUR 3.48 in 2003. The total intrinsic value of options exercised was EUR 2 million in 2005, EUR 3 million in 2004 and EUR 66 million in 2003. The options outstanding by range of exercise price at December 31, 2005 are as follows: Options outstanding Vested options outstanding Weighted average remaining Weighted remaining Exercise prices, EUR Number of shares contractual Weighted average life in years exercise price, EUR Number of shares contractual Weighted average life in years exercise price, EUR 0.56 – 14.48 14.95 – 17.72 17.89 18.63 – 36.49 36.75 – 47.14 15 404 732 27 034 385 44 820 871 19 557 612 38 914 286 145 731 886 2.89 1.23 0.60 0.38 0.40 12.24 14.96 17.89 26.65 36.77 2 631 467 15 136 134 37 025 490 18 388 030 38 914 286 112 095 407 1.81 0.59 0.50 0.38 0.40 11.13 14.96 17.89 26.65 36.77 26 Nokia in 2005 Notes to the consolidated financial statements Nokia calculates the fair value of options using the Black Scholes model. The fair value of the stock options is estimated on the date of grants using the following assumptions: Dividend yield Weighted average expected volatility Risk-free interest rate Weighted average risk-free interest rate Expected life (years) Weighted average share price 2005 2004 2003 2.50 % 25.92 % 2 16 – 3.09 % 2.60 % 3.59 13.20 2.44 % 33.00 % 2 24 – 4.22 % 3.07 % 3.20 11.84 2.05 % 35.00 % 2 20 – 3.70 % 2.80 % 3.60 14.53 Expected term of share options is estimated by observing general option holder behaviour and actual historical terms of Nokia stock option programs. The assumption of the expected volatility has been set by reference to the implied volatility of options available on Nokia shares in the open market and in light of historical patterns of volatility. Performance shares The Group has granted performance shares under the 2004 and 2005 performance share plans, which have been approved by the Board of Directors. A valid authorization from the Annual General Meeting is required, when the plans are settled using the Company’s newly issued shares or disposal of existing treasury shares. The Group may also settle the plans using shares purchased on the open market or in lieu of shares cash settlement. The Group introduced performance shares in 2004 as the main element to broad-based equity compensation program, to further emphasize the performance element in employees’ long-term incentives. The performance shares represent a commitment by the Company to deliver Nokia shares to employees at a future point in time, subject to the company’s fulfi llment of pre- defi ned performance criteria. No performance shares will vest unless the Company’s performance reaches at least one of the threshold levels measured by two independent, pre-defi ned performance criteria. For performance between the threshold and maximum performance levels the settlement follows a linear scale. Performance exceeding the maximum criteria does not increase the number of shares vesting. The maximum number of performance shares (Maximum Number) equals four times the number originally granted (Threshold Number). The criteria are calcu- lated based on the Group’s Average Annual Net Sales Growth and Earnings per Share (“EPS”) Growth (basic) for the four year performance period of the plan. For the 2004 plan the performance period consists of the fi scal years 2004 through 2007 and for the 2005 plan the years 2005 through 2008. For both the 2004 and 2005 plans, if either of the required performance levels are achieved, the fi rst settlement will take place after two years’ interim measurement period and is limited to a maximum vesting equal to the Threshold Number. The second and fi nal settlement, if any, will be after the close of the four year performance period. Any settlement made after the Interim Measurement Period, will be deducted from the fi nal settlement after the full Performance Period. The following tables give certain information about our 2004 and 2005 performance share plans. Plan name 2004 2005 Total Plan Size (Threshold Number) Number of participants (approx.) Interim Measurement Period Performance Period 1st (Interim) Settlement 2nd (Final) Settlement 3 685 063 4 357 754 11 000 12 000 2004 – 2005 2005 – 2006 2005 – 2008 2006 – 2009 2006 2007 2009 2010 Performance criterion 1 2004 Plan 2005 Plan Threshold Performance EPS growth Maximum Performance Average Annual Net Sales Growth EPS growth Average Annual Net Sales Growth Interim Measurement Period Performance Period Vesting (no. of shares) 2 Interim Measurement Period Performance Period Vesting (no. of shares) 2 Interim Measurement Period Performance Period Vesting (no. of shares) 2 Interim Measurement Period Performance Period Vesting (no. of shares) 2 0.80 0.84 1.84 million 4% 4% 1.84 million 0.94 1.18 7.37 million 16% 16% 7.37 million 0.75 0.82 2.18 million 3 % 3 % 2.18 million 0.96 1.33 8.72 million 12 % 12 % 8.72 million 1 Both the EPS and Average Annual Net Sales Growth criteria have an equal weight of 50%. 2 A performance share represents the grant at threshold. At maximum performance, the settlement amounts to 4 times the number of shares originally granted at threshold. Notes to the consolidated fi nancial statement 27 Notes to the consolidated financial statements 28 Nokia in 2005 In accordance with the plan rules, prior to vesting, the Group will determine the method by which the shares are obtained for delivery, which may also include cash settlement. Until the shares are transferred and delivered, the recipients will not have any shareholder rights, such as voting or dividend rights associated with respect to the performance shares. The table below gives certain information relating to the performance shares outstanding as at December 31, 2005. Number of performance shares at Threshold Weighted average grant date fair value EUR 1 Performance shares at January 1, 2005 Granted Forfeited Performance shares at December 31, 2005 3 910 840 4 469 219 337 242 8 042 817 10.58 11.86 10.74 11.28 1 The fair value of performance shares is estimated based on the grant date market price of the Company’s share less expected dividends. Weighted average remaining contractual term (years) 3.25 3.74 3.88 2.79 No performance shares vested during the year. Based on the performance of the Group during the Interim Measurement Period 2004 – 2005, under the 2004 Performance Share Plan, both performance criteria were met and as such 3.68 million shares equalling the threshold number are expected to vest in 2006. The shares will vest as of the date of the Annual General Meeting of the Group on March 30, 2006 and the settlement will take place as soon as practicable after vesting. Restricted shares Since 2003, the Group has granted restricted shares to recruit, retain, reward and motivate selected high potential employees, who are critical to the future success. The restricted share plans 2003, 2004 and 2005 have been approved by the Board of Directors. A valid authorization from the Annual General Meet- ing is required when the plans are settled using the Company’s newly issued shares or disposal of existing own shares. The Group may also settle the plans using shares purchased on the open market. The number of participants in the restricted share plans is approxi- mately 500. All of our restricted share grants have a restriction period of three years after grant, after which period the granted shares will vest. As soon as practicable after vesting, they will be transferred and delivered to the recipients. Until shares are trans- ferred and delivered, the recipients will not have any shareholder rights, such as voting or dividend rights associated with these restricted shares. The table below gives certain information relating to the Restricted Shares outstanding as at December 31, 2005. Number of Restricted Shares Weighted average grant date fair value EUR 1 Restricted Shares at January 1, 2005 Granted Forfeited Restricted Shares at December 31, 2005 2 319 430 3 016 746 150 500 5 185 676 11.55 12.14 14.31 11.59 Weighted average remaining contractual term (years) 2.06 2.76 0.74 2.06 1 The fair value of Restricted Shares is estimated based on the grant date market price of the Company’s share less expected dividends. No Restricted Shares vested during the year. Other equity plans for employees The Group also sponsors other immaterial equity plans for employees. Total compensation cost related to unvested awards As of December 31, 2005, there was EUR 287 million of total deferred compensation cost related to nonvested share-based compensation arrangements granted under the company’s plans, including deferred com- pensation recorded related to other social costs. That cost is expected to be recognized over a weighted average period of 2.89 years. The total fair value of shares vested during the years ended December 31, 2005, 2004 and 2003 was EUR 150 million, EUR 242 mil- lion and EUR 300 million, respectively. 25. Distributable earnings 27. Deferred taxes EURm 2005 EURm 2005 2004 Notes to the consolidated financial statements Retained earnings Translation differences (distributable earnings) Treasury shares Other non-distributable items Portion of untaxed reserves Distributable earnings December 31 13 154 – 176 – 3 616 91 9 453 Retained earnings under IFRS and Finnish Accounting Standards (FAS) are substan- tially the same. Distributable earnings are calculated based on Finnish legislation. 26. Long-term liabilities Long-term loans are repayable as follows: Repayment date Outstanding Dec. 31, 2005 EURm beyond Outstanding 5 years Dec. 31, 2004 EURm EURm Long-term interest-bearing liabilities Other long-term liabilities Deferred tax liabilities Total long-term liabilities 21 96 117 21 96 117 151 268 19 96 115 179 294 The long-term liabilities, excluding deferred tax liabilities as of December 31, 2005, mature as follows: 2006 2007 2008 2009 2010 Thereafter EURm Percent of total – – – – – 117 117 – – – – – 100.0 % 100.0 % The currency mix of the Group long-term liabilities as at December 31, 2005 was as follows: EUR 96.00 % USD 4.00 % Deferred tax assets: Intercompany profi t in inventory Tax losses carried forward Warranty provision Other provisions Fair value gains/losses Untaxed reserves Other temporary differences Total deferred tax assets Deferred tax liabilities: Untaxed reserves Fair value gains/losses Undistributed earnings Other Total deferred tax liabilities Net deferred tax asset 49 7 107 170 43 88 228 692 – 24 – – 68 – 59 – 151 541 41 12 118 174 – 88 190 623 – 30 – 28 – 60 – 61 – 179 444 The tax charged to shareholders’ equity is as follows: Fair value and other reserves, fair value gains/losses 93 – 7 In 2005, the corporate tax rate in Finland reduced from 29 % to 26 %. The decrease of tax rate had no impact in deferred taxes in 2005 (a reduction of EUR 26 million in net deferred tax assets in 2004). During 2004, the Group analyzed the majority of its future foreign investment plans with respect to foreign investments. As a result of this analysis, the Group concluded that it could no longer represent that all foreign earnings may be perma- nently reinvested. Accordingly, the Group recorded the recognition of a EUR 68 million deferred tax liability during 2005 (EUR 60 million in 2004). At December 31, 2005 the Group had loss carry forwards of EUR 71 million (EUR 67 million in 2004) for which no deferred tax asset was recognized due to uncertainty of utilization of these loss carry forwards. These loss carry forwards will expire in years 2006 through 2011. 28. Short-term borrowings Short-term borrowings consist primarily of borrowings from banks denominated in different foreign currencies. The weighted average interest rate at December 31, 2005 and 2004 was 4.68% and 3.07%, respectively. 29. Accrued expenses EURm Social security, VAT and other taxes Wages and salaries Prepaid income Other Total 2005 2004 As revised 790 326 268 1 936 3 320 448 209 293 1 654 2 604 Other operating expense accruals include various amounts which are individually insignifi cant. Notes to the consolidated fi nancial statement 29 Notes to the consolidated financial statements 30. Provisions EURm At January 1, 2005, As revised Exchange differences Additional provisions Change in fair value Changes in estimates Charged to profi t and loss account Utilized during year At December 31, 2005 Warranty IPR infringements 1 217 22 819 – – 202 617 – 675 1 181 358 – 101 – – 41 60 – 22 396 Tax 364 – 64 – – 42 22 – 386 Other 549 – 169 3 – 39 133 – 166 516 Total 2 488 22 1 153 3 – 324 832 – 863 2 479 EURm Analysis of total provisions at December 31: Non-current Current 2005 2004 788 1 691 726 1 762 The IPR provision is based on estimated future settlements for asserted and unas- serted past IPR infringements. Final resolution of IPR claims generally occurs over several periods. This results in varying usage of the provision year to year. Other provisions include provisions for non-cancelable purchase commitments, provision for pension and other social costs on share-based awards and provision for losses on projects in progress. 31. Earnings per share Numerator/EURm Basic/Diluted: Profi t attributable to equity holders of the parent Denominator/1 000 shares Basic: Weighted average shares Effect of dilutive securities: stock options, restricted shares and performance shares Diluted: Adjusted weighted average shares and assumed conversions 2005 2004 As revised 2003 As revised 3 616 3 192 3 543 4 365 547 4 593 196 4 761 121 5 692 7 141 40 4 371 239 4 600 337 4 761 160 Under IAS 33, basic earnings per share is computed using the weighted average number of shares outstanding during the period. Diluted earnings per share is com- puted using the weighted average number of shares outstanding during the period plus the dilutive effect of stock options, restricted shares and performance shares outstanding during the period. 30 Nokia in 2005 32. Commitments and contingencies EURm 2005 2004 Collateral for our own commitments Property under mortgages Assets pledged Contingent liabilities on behalf of Group companies Other guarantees Contingent liabilities on behalf of other companies Guarantees for loans 1 Other guarantees Financing commitments Customer fi nance commitments 1 1 See also Note 38 b. 18 10 18 11 276 275 – 2 13 3 2 56 Notes to the consolidated financial statements 33. Leasing contracts The Group leases offi ce, manufacturing and warehouse space under various non- cancellable operating leases. Certain contracts contain renewal options for various periods of time. The future costs for non-cancellable leasing contracts are as follows: Leasing payments, EURm Operating leases 187 144 108 88 60 77 664 2006 2007 2008 2009 2010 Thereafter Total The amounts above represent the maximum principal amount of commitments and contingencies. Rental expense amounted to EUR 262 million in 2005 (EUR 236 million in 2004 and EUR 285 million in 2003). Property under mortgages given as collateral for our own commitments include mortgages given to the Finnish National Board of Customs as a general indemnity of EUR 18 million in 2005 (EUR 18 million in 2004). Assets pledged for the Group’s own commitments include available-for-sale investments of EUR 10 million in 2005 (EUR 11 million of available-for-sale invest- ments in 2004). Other guarantees include guarantees of Nokia’s performance of EUR 234 million in 2005 (EUR 223 million in 2004). However, EUR 182 million of these guarantees are provided to certain Networks’ customers in the form of bank guarantees, standby letters of credit and other similar instruments. These instruments entitle the customer to claim payment as compensation for non-performance by Nokia of its obligations under network infrastructure supply agreements. Depending on the na- ture of the instrument, compensation is payable either immediately upon request, or subject to independent verifi cation of nonperformance by Nokia. Guarantees for loans on behalf of other companies of EUR 0 million in 2005 (EUR 3 million in 2004) represent guarantees relating to payment by certain Net- works’ customers under specifi ed loan facilities between such customers and their creditors. Nokia’s obligations under such guarantees are released upon the earlier of expiration of the guarantee or early payment by the customer. Financing commitments of EUR 13 million in 2005 (EUR 56 million in 2004) are available under loan facilities negotiated with customers of Networks. Availability of the amounts is dependent upon the borrower’s continuing compliance with stated fi nancial and operational covenants and compliance with other administra- tive terms of the facility. The loan facilities are primarily available to fund capital expenditure relating to purchases of network infrastructure equipment and services and to fund working capital. The Group has been named as defendant along with certain of its senior executives in a class action complaint in the United States relating to certain public statements about its product portfolio and related fi nancial projections in early 2004. The Group does not believe that the claim has merit and intends to vigorously defend itself. The Group is party to routine litigation incidental to the normal conduct of business. In the opinion of management the outcome of and liabilities in excess of what has been provided for related to these or other proceedings, in the aggregate, are not likely to be material to the fi nancial condition or results of operations. As of December 31, 2005, the Group had purchase commitments of EUR 1 919 million (EUR 1 236 million in 2004) relating to inventory purchase obligations, primarily for purchases in 2006. Notes to the consolidated fi nancial statement 31 Notes to the consolidated financial statements 34. Related party transactions Nokia Pension Foundation is a separate legal entity that manages and holds in trust the assets for the Group’s Finnish employee benefi t plans; these assets include 0.009 % of Nokia shares. At December 31, 2005, the Group had borrowings amounting to EUR 62 million (EUR 62 million in 2004) from Nokia Unterstützungskasse GmbH, the Group’s German pension fund, which is a separate legal entity. The Group recorded net rental expense of EUR 2 million in 2005 (EUR 2 million in 2004 and EUR 2 million in 2003) pertaining to a sale-leaseback transaction with the Nokia Pension Foundation involving certain buildings and a lease of the underlying land. There were no loans granted to the members of the Group Executive Board and Board of Directors at December 31, 2005 or 2004. EURm 2005 2004 2003 Transactions with associated companies Share of results of associated companies Dividend income Share of shareholders’ equity of associated companies Liabilities to associated companies Management remuneration 10 1 33 14 – 26 2 37 3 – 18 3 18 3 CEO and Chairman, and President The following table depicts the base salary and cash incentive payments informa- tion awarded to the Chief Executive Offi cer and Chairman, and the President of Nokia Corporation for fi scal years 2003-2005 as well as the share-based compensa- tion expense relating to equity-based awards, expensed by the Group. 2005 2004 2003 Base salary EUR Cash Share-based incentive compensation payments EUR expense EUR Base salary EUR Cash Share-based incentive compensation payments EUR expense EUR Base salary EUR Cash Share-based incentive compensation payments EUR expense EUR Jorma Ollila CEO and Chairman Olli-Pekka Kallasvuo President since Oct. 1, 2005 Pekka Ala-Pietilä President until Oct. 1, 2005 1 1 500 000 3 212 037 3 389 994 1 475 238 1 936 221 2 109 863 1 400 000 2 253 192 1 028 775 623 524 947 742 666 313 584 000 454 150 394 979 575 083 505 724 154 316 717 000 946 332 745 733 717 000 479 509 493 556 711 279 520 143 218 615 1 Pekka Ala-Pietilä served as the President of the Group and member of the Group Executive Board until he resigned from these positions effective October 1, 2005. As of this date Mr. Ala-Pietilä held the role of Executive Advisor until January 31, 2006, when he ceased employment with the Group. For 2006, based on these advisory services, Mr. Ala-Pietilä received a total payment of EUR 101 717. Based on the service contract, Pekka Ala-Pietilä is entitled to receive a payment of EUR 956 000 in 2006 for his commitments during 2006. Total remuneration of the Group Executive Board awarded for the fi scal years ended 2003 – 2005 was EUR 14 684 602 in 2005 (EUR 13 594 942 in 2004 and EUR 10 859 644 in 2003), which consisted of base salaries and cash incentive payments. Total share- based compensation expense relating to equity-based awards, expensed by the Group was EUR 8 295 227 in 2005 (EUR 4 763 545 in 2004 and EUR 1 776 736 in 2003). 32 Nokia in 2005 Notes to the consolidated financial statements Board of Directors The following table depicts the annual remuneration structure paid to the members of our Board of Directors, as resolved by the Annual General Meetings in the respec- tive years. Since the fi scal year 1999, approximately 60 % of each Board member’s annual fee has been paid in cash, with the balance in Nokia Corporation shares acquired from the market. Chairman Vice Chairman Other Members Gross annual fee EUR Shares received 1 Gross annual fee EUR Shares received 1 Gross annual fee EUR Shares received 1 Additional annual fees 150 000 4 032 125 000 3 360 100 000 2 688 Year 2003 2004 150 000 4 834 125 000 4 028 100 000 3 223 2005 165 000 5 011 137 500 4 175 110 000 3 340 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000; Each other member of the Audit Committee, EUR 10 000 1 As part of the gross annual fee for that year. The following table depicts the total annual remuneration paid to the members of our Board of Directors, as resolved by the Annual General Meetings in the respective years. Gross annual fee * 2005 EUR 2004 EUR 2003 EUR 165 000 150 000 150 000 162 500.2 120 000 3 110 000 110 000 135 000 4 110 000 110 000 120 000 5 120 000 6 150 000 2 150 000 2 100 000 100 000 – 100 000 125 000 4 – 100 000 100 000 100 000 – 100 000 125 000 – 100 000 100 000 100 000 – – 125 000 7 Board of directors Jorma Ollila 1 Chairman and CEO Paul Collins Vice Chairman Georg Ehrnrooth Daniel R. Hesse Dr. Bengt Holmström Per Karlsson Edouard Michelin Dame Marjorie Scardino Vesa Vainio Arne Wessberg Former Board Member: Robert F.W. van Oordt 1 2 3 4 In addition to the fee as the Chairman of the Board, Jorma Ollila receives compensation for his services as the CEO of Nokia Corporation. This annual cash compensation is presented in the table “CEO and Chairman, and President” above. The 2005 fee of Paul Collins amounts to a total of EUR 162 500, consisting of a fee of EUR 137 500 for services as Vice Chairman of the Board and EUR 25 000 for services as Chairman of the Personnel Committee. Each 2004 and 2003 fees of Mr. Collins amounted to a total of EUR 150 000, consisting of a fee of EUR 125 000 for services as Vice Chairman of the Board and EUR 25 000 for services as Chair- man of the Personnel Committee. As part of the total remuneration, Mr. Collins has received a total of 4 935 Nokia shares in 2005, 4 834 Nokia shares in 2004 and 4 032 Nokia shares in 2003. The 2005 fee of Georg Ehrnrooth amounts to a total of EUR 120 000 consisting of a fee of EUR 110 000 for services as a member of the Board and EUR 10 000 for services as a member of the Audit Committee. As part of the total remuneration, Mr. Ehrnrooth has received a total of 3 644 Nokia shares. The 2005 fee of Per Karlsson amounts to a total of EUR 135 000, consisting of a fee of EUR 110 000 for services as Member of the Board and EUR 25 000 for services as Chairman of the Audit Com- mittee. The 2004 fee of Mr. Karlsson amounted to a total of EUR 125 000, consisting of a fee of EUR 100 000 for services as member of the Board and EUR 25 000 for services as Chairman of the Audit Committee. As part of the total remuneration, Mr. Karlsson has received a total of 4 100 Nokia shares in 2005 and 4 029 Nokia shares in 2004. 5 6 7 * The 2005 fee of Vesa Vainio amounts to a total of EUR 120 000 consisting of a fee of EUR 110 000 for services as a member of the Board and EUR 10 000 for services as a member of the Audit Committee. As part of the total remuneration, Mr. Vainio has received a total of 3 644 Nokia shares. The 2005 fee of Arne Wessberg amounts to a total of EUR 120 000 consisting of a fee of EUR 110 000 for services as a member of the Board and EUR 10 000 for services as a member of the Audit Commit- tee. As part of the total remuneration, Mr. Wessberg has received a total of 3 644 Nokia shares. The 2003 fee of Robert F.W. van Oordt amounted to a total of EUR 125 000, consisting of a fee of EUR 100 000 for services as Member of the Board and EUR 25 000 for services as Chairman of the Audit Committee. As part of the total remuneration, Mr. van Oordt received a total of 3 360 Nokia shares. In case a Board member’s gross annual fee does not include any additional annual fees, the number of shares received as part of gross annual fee for that year is presented in the “Shares received” column above. Notes to the consolidated fi nancial statement 33 Notes to the consolidated financial statements Retirement benefi ts of certain Group Executive Board Members Jorma Ollila and Olli-Pekka Kallasvuo can as part of their service contract retire at the age of 60 with full retirement benefi t, should they be employed by Nokia at the time. The full retirement benefi t is calculated as if the executive had continued his service with Nokia through the statutory retirement age of 65. Mr. Ollila’s service contract will terminate as of June 1, 2006. Following the current contract, he will not be eligible to receive any additional retirement benefi ts from Nokia after that date. Pekka Ala-Pietilä had an equal retirement arrangement during his employment at Nokia and he will not receive any additional retirement benefi ts from Nokia after termination of employment. Hallstein Moerk, following his arrangement with a previous employer, has a retirement benefi t of 65 % of his pensionable salary beginning at the age of 62. Early retirement is possible at the age of 55 with reductions in benefi ts. Simon Beresford-Wylie participates in the Nokia International Employee Benefi t Plan (NIEBP). The NIEBP is a defi ned contribution retirement arrangement provided to some Nokia employees on international assignments. The contributions to NIEBP are funded two-thirds by Nokia and one-third by the employee. Because Mr. Beresford-Wylie also participates in the Finnish TEL system, the company contri- bution to NIEBP is 1.3 % of annual earnings. 35. Notes to cash flow statement EURm Adjustments for: Depreciation and amortization (Note 11) (Profi t)/loss on sale of property plant and equipment and available-for-sale investments Income taxes (Note 13) Share of results of associated companies (Note 34) Minority interest Financial income and expenses (Note 12) Impairment charges (Note 9) Share-based compensation Premium return Customer fi nancing impairment charges and reversals Other Adjustments, total Change in net working capital (Increase) Decrease in short-term receivables Increase in inventories Increase in interest-free short-term borrowings Change in net working capital Non-cash investing activities Acquisition of: Current available-for-sale investments in settlement of customer loan Company acquisitions Total 2005 2004 As revised 2003 As revised 712 868 1 138 – 131 1 281 – 10 74 – 322 66 104 – – – 1 774 – 896 – 301 831 – 366 26 1 446 26 67 – 405 129 62 – 160 – – 2 059 372 – 193 62 241 – – – – – – 170 1 697 18 54 – 352 453 41 – – 226 – 1 2 992 – 205 – 41 62 – 184 676 18 694 36. Subsequent events (unaudited) Changes in the Nokia Group Executive Board On February 15, 2006 the Group announced that Pertti Korhonen, Chief Technology Offi cer and Executive Vice President, Technology Platforms, and a member of the Group Executive Board will resign from the Group Executive Board as of April 1, 2006. He will also resign from Nokia. Niklas Savander has been appointed as Execu- tive Vice President, Technology Platforms and a member of the Group Executive Board as of April 1, 2006. Preliminary Agreement with SANYO On February 14, 2006, the Group and SANYO Electric Co., Ltd announced a preliminary agreement with intent to form a new global company comprised of their respective CDMA mobile phone businesses – separate from the parent companies. The relevant assets from both companies will be contributed or made available for the new entity. Final agreements are expected to be signed in the second quarter of 2006, with the new business expected to commence operations in the third quarter 2006, provided that the due diligence has been completed and all necessary regulatory approvals obtained. Acquisition of Intellisync In February 2006, the Group acquired 100 percent of the outstanding common shares of Intellisync (NASDAQ: SYNC) for cash consideration of approximately EUR 368 million. Intellisync delivers wireless email and other applications over an array of devices and application platforms across carrier networks. The Group believes it is positioned to deliver the industry’s most complete offering for the de- velopment, deployment and management of mobility in the enterprise and the ac- quisition will enhance the Group’s ability to respond to customer needs in this fast growing market. Intellisync will be integrated into the Enterprise Solutions business upon acquisition and its results of operations from that date will be included in the Group’s consolidated fi nancial statements The purchase price allocation is being performed with the assistance of a third party. Assets acquired are expected to be EUR 51 million and liabilities EUR 17 million with a majority of the excess recognised as goodwill. The principal items that are expected to generate goodwill are the value of the synergies between Intellisync and the Group and the acquired workforce, neither of which qualifi es as a separate amortizable intangible asset. None of the goodwill is expected to be deductible for tax purposes. The Group does not expect to write off any in-process R&D or dispose of any of the acquired operations. For its recently completed fi scal year ended July 31, 2005 and quarter ended October 31, 2005, Intellisync reported revenues of USD 39 million (EUR 31 million) and USD 10 million (EUR 8 million), respectively, and net loss of USD 13 million (EUR 10 million) and USD 8 million (EUR 7 million), respectively. At July 31, 2005 and October 31, 2005, Intellisync’s total assets were USD 161 million (EUR 133 million) and USD 156 million (EUR 130 million), respectively, and shareholders’ equity was USD 82 million (EUR 68 million) and USD 79 million (EUR 66 million), respectively. Telsim settlement As previously agreed with Telsim and the Turkish Savings and Deposit Insurance Fund (TMSF), which currently controls and manages Telsim’s assets, the Group will receive a settlement payment upon completion of the sale of Telsim’s assets for losses the Group incurred in 2001. The Group’s share of the announced purchase price expected to be received during the fi rst half of 2006 is 7.5 % of the purchase price, or USD 341 million (EUR 285 million) and is subject to negotiations. 34 Nokia in 2005 37. Principal Nokia Group companies at December 31, 2005 % US DE GB KR CN NL HU BR IN Nokia Inc. Nokia GmbH Nokia UK Limited Nokia TMC Limited Nokia Capitel Telecommunications Ltd Nokia Finance International B.V. Nokia Komárom Kft Nokia do Brazil Technologia Ltda Nokia India Ltd Associated companies Symbian Limited Parent Group holding majority – 100.00 – 100.00 4.50 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 61.90 100.00 100.00 100.00 100.00 47.90 47.90 A complete list of subsidiaries and associated companies is included in Nokia’s Statutory Accounts. 38. Risk management General risk management principles Nokia’s overall risk management concept is based on visibility of the key risks preventing Nokia from reaching its business objectives. This covers all risk areas: strategic, operational, fi nancial and hazard risks. Risk management at Nokia is a systematic and pro-active way to analyze, review and manage all opportunities, threats and risks related to Nokia’s objectives rather than to solely eliminate risks. The principles documented in Nokia’s Risk Policy and accepted by the Audit Committee of the Board of Directors require risk management and its elements to be integrated into business processes. One of the main principles is that the busi- ness or function owner is also the risk owner, however, it is everyone’s responsibil- ity at Nokia to identify risks preventing us from reaching our objectives. Key risks are reported to the business and Group level management to create assurance on business risks and to enable prioritization of risk management imple- mentation at Nokia. In addition to general principles there are specifi c risk manage- ment policies covering, for example, treasury and customer fi nance risks. Financial risks The key fi nancial targets for Nokia are growth, profi tability, operational effi ciency and a strong balance sheet. The objective for the Treasury function is twofold: to guarantee cost-effi cient funding for the Group at all times, and to identify, evaluate and hedge fi nancial risks in close co-operation with the business groups. There is a strong focus in Nokia on creating shareholder value. The Treasury function supports this aim by minimizing the adverse effects caused by fl uctuations in the fi nancial markets on the profi tability of the underlying businesses and by managing the bal- ance sheet structure of the Group. Nokia has Treasury Centers in Geneva, Singapore/Beijing and New York/Sao Paolo, and a Corporate Treasury unit in Espoo. This international organization enables Nokia to provide the Group companies with fi nancial services according to local needs and requirements. The Treasury function is governed by policies approved by top manage- ment. Treasury Policy provides principles for overall fi nancial risk management and determines the allocation of responsibilities for fi nancial risk management in Nokia. Operating Policies cover specifi c areas such as foreign exchange risk, inter- est rate risk, use of derivative fi nancial instruments, as well as liquidity and credit risk. Nokia is risk averse in its Treasury activities. Business Groups have detailed Standard Operating Procedures supplementing the Treasury Policy in fi nancial risk management related issues. Notes to the consolidated financial statements a) Market risk Foreign exchange risk Nokia operates globally and is thus exposed to foreign exchange risk arising from various currency combinations. Foreign currency denominated assets and liabilities together with expected cash fl ows from highly probable purchases and sales give rise to foreign exchange exposures. These transaction exposures are managed against various local currencies because of Nokia’s substantial production and sales outside the Eurozone. Due to the changes in the business environment, currency combinations may also change within the fi nancial year. The most signifi cant non-euro sales curren- cies during the year were US dollar (USD), Chinese yuan (CNY) and UK pound sterling (GBP). In general, depreciation of another currency relative to the euro has an adverse effect on Nokia’s sales and operating profi t, while appreciation of another currency has a positive effect, with the exception of Japanese yen (JPY), being the only signifi cant foreign currency in which Nokia has more purchases than sales. The following chart shows the break-down by currency of the underlying net foreign exchange transaction exposure as of December 31, 2005 (in some of the currencies, especially the US dollar, Nokia has both substantial sales as well as cost, which have been netted in the chart). Others 11 % THB 2 % AUD 3 % GBP 10 % JPY 26 % USD 48 % According to the foreign exchange policy guidelines of the Group, material transaction foreign exchange exposures are hedged. Exposures are mainly hedged with derivative fi nancial instruments such as forward foreign exchange contracts and foreign exchange options. The majority of fi nancial instruments hedging foreign exchange risk have a duration of less than a year. The Group does not hedge forecasted foreign currency cash fl ows beyond two years. Nokia uses the Value-at-Risk (“VaR”) methodology to assess the foreign exchange risk related to the Treasury management of the Group exposures. The VaR fi gure represents the potential fair value losses for a portfolio resulting from ad- verse changes in market factors using a specifi ed time period and confi dence level based on historical data. To correctly take into account the non-linear price function of certain derivative instruments, Nokia uses Monte Carlo simulation. Volatilities and correlations are calculated from a one-year set of daily data. The VaR fi gures as- sume that the forecasted cash fl ows materialize as expected. The VaR fi gures for the Group transaction foreign exchange exposure, including hedging transactions and Treasury exposures for netting and risk management purposes, with a one-week horizon and 95% confi dence level, are shown in Table 1, below. Table 1 Transaction foreign exchange position Value-at-Risk VaR At December 31 Average for the year Range for the year 2005 EURm 2004 EURm 12.4 10.2 3.3 – 29.3 12.7 14 1.6 – 26.9 Since Nokia has subsidiaries outside the Eurozone, the euro-denominated value of the shareholders’ equity of Nokia is also exposed to fl uctuations in exchange rates. Equity changes caused by movements in foreign exchange rates are shown as a translation difference in the Group consolidation. Nokia uses, from time to time, foreign exchange contracts and foreign currency denominated loans to hedge its equity exposure arising from foreign net investments. Notes to the consolidated fi nancial statement 35 Notes to the consolidated financial statements Interest rate risk The Group is exposed to interest rate risk either through market value fl uctuations of balance sheet items (i.e. price risk) or through changes in interest income or expenses (i.e. re-investment risk). Interest rate risk mainly arises through interest- bearing liabilities and assets. Estimated future changes in cash fl ows and balance sheet structure also expose the Group to interest rate risk. Treasury is responsible for monitoring and managing the interest rate exposure of the Group. Due to the current balance sheet structure of Nokia, emphasis is placed on managing the interest rate risk of investments. Nokia uses the VaR methodology to assess and measure the interest rate risk in the investment portfolio, which is benchmarked against a combination of three- month and one-to-three-year investment horizon. The VaR fi gure represents the potential fair value losses for a portfolio resulting from adverse changes in market factors using a specifi ed time period and confi dence level based on historical data. For interest rate risk VaR, Nokia uses variance-covariance methodology. Volatilities and correlations are calculated from a one-year set of daily data. The VaR-based interest rate risk fi gures for an investment portfolio with a one-week horizon and 95% confi dence level are shown in Table 2, below. Table 2 Treasury investment portfolio Value-at-Risk VaR At December 31 Average for the year Range for the year 2005 EURm 2004 EURm 6.9 10.0 6.9 – 15.3 10.4 6.3 3.6 – 10.8 Equity price risk Nokia has certain strategic minority investments in publicly traded companies. These investments are classifi ed as available-for-sale. The fair value of the equity investments at December 31, 2005 was EUR 8 million (EUR 7 million in 2004). There are currently no outstanding derivative fi nancial instruments designated as hedges of these equity investments. The VaR fi gures for equity investments, shown in Table 3, below, have been calculated using the same principles as for interest rate risk. Table 3 Equity investments Value-at-Risk VaR At December 31 Average for the year Range for the year 2005 EURm 0.1 0.2 0.1 – 0.2 2004 EURm 0.1 0.2 0.1 – 0.3 In addition to the listed equity holdings, Nokia invests in private equity through Nokia Venture Funds. The fair value of these available-for-sale equity investments at December 31, 2005 was USD 177 million (USD 142 million in 2004). Nokia is exposed to equity price risk on social security costs relating to stock compensation plans. Nokia hedges this risk by entering into cash settled equity swap and option contracts. b) Credit risk Structured Finance Credit Risk Network operators in some markets sometimes require their suppliers to arrange or provide term fi nancing in relation to infrastructure projects. Nokia has maintained a fi nancing policy aimed at close cooperation with banks, fi nancial institutions and Export Credit Agencies to support selected customers in their fi nancing of infra- structure investments. Nokia actively mitigates, market conditions permitting, this exposure by arrangements with these institutions and investors. Credit risks related to customer fi nancing are systematically analyzed, monito- red and managed by Nokia’s Customer Finance organization, reporting to the Chief Financial Offi cer. Credit risks are approved and monitored by Nokia’s Credit Com- mittee along principles defi ned in the Company’s credit policy and according to the credit approval process. The Credit Committee consists of the CFO, Group Controller, Head of Group Treasury and Head of Nokia Customer Finance. At the end of December 31, 2005, our long-term loans to customers and other third parties totaled EUR 63 million (no outstanding loans in 2004), while there was nil fi nancial guarantees given on behalf of third parties (EUR 3 million in 2004). In addition, we had fi nancing commitments totaling EUR 13 million, which does not, however, increase total outstanding and committed credit risk from EUR 63 million, as it is available only provided that outstanding loan EUR 56 million is repaid. Total structured fi nancing (outstanding and committed) stood at EUR 63 million (EUR 59 million in 2004). The term structured fi nancing portfolio at December 31, 2005 was: EURm Outstanding Financing commitments Total Portfolio 63 13 Total 63 The term structured fi nancing portfolio at December 31, 2005 mainly consists of outstanding and committed customer fi nancing to a network operator. Financial credit risk Financial instruments contain an element of risk of the counterparties being unable to meet their obligations. This risk is measured and monitored by the Treasury function. The Group minimizes fi nancial credit risk by limiting its counterparties to a suffi cient number of major banks and fi nancial institutions, as well as through entering into netting arrangements, which gives the Company the right to offset in the case that the counterparty would not be able to fulfi ll the obligations. Direct credit risk represents the risk of loss resulting from counterparty default in relation to on-balance sheet products. The fi xed income and money market investment decisions are based on strict creditworthiness criteria. The outstanding investments are also constantly monitored by the Treasury. Nokia does not expect the counterparties to default given their high credit quality. 36 Nokia in 2005 Notes to the consolidated financial statements Current available-for-sale investments 1, 2, 3 Maturity date less than 12 months Maturity date 12 months or more Total Fair value Unrealized Unrealized losses gains Fair value Unrealized Unrealized losses gains Fair value Unrealized Unrealized losses gains 30 2 962 60 25 3 077 1 820 3 927 166 – 5 913 – –3 – – –3 – – – – – – – – – – 1 1 – – 2 3 919 803 433 112 5 267 3 999 428 302 65 4 794 –32 –5 –1 – –38 –14 –1 – – –15 2 1 2 – 5 4 2 10 – 16 3 949 3 765 459 172 8 345 5 819 4 355 468 65 10 707 –32 –7 –1 – –41 –14 –1 – – –15 2 1 2 – 5 5 3 10 – 18 2005 7 531 814 8 345 2004 10 429 278 10 707 internally managed. Nokia’s Insurance & Risk Finance function’s objective is to ensure that Group’s hazard risks, whether related to physical assets (e.g. buildings) or intellectual assets (e.g. Nokia) or potential liabilities (e.g. product liability) are optimally insured. Nokia purchases both annual insurance policies for specifi c risks as well as multi-line and/or multi-year insurance policies, where available. 2005, EURm Governments Banks Corporates Asset backed securities 2004, EURm Governments Banks Corporates Asset backed securities EURm Fixed rate investments Floating rate investments Total 1 2 3 Available-for-sale investments are carried at fair value in 2005 and 2004. Weighted average interest rate for current available-for-sale investments was 3.52 % in 2005 and 3.63 % in 2004. Notional amounts of derivative fi nancial instruments 1 Included within current Available-for-sale investments is EUR 10 million and EUR 11 million of restricted cash at December 31, 2005 and 2004, respectively. EURm c) Liquidity risk Nokia guarantees a suffi cient liquidity at all times by effi cient cash management and by investing in liquid interest bearing securities. Due to the dynamic nature of the underlying business Treasury also aims at maintaining fl exibility in funding by keeping committed and uncommitted credit lines available. At the end of December 31, 2005 the committed facility totaled USD 2.0 billion. The committed credit facility is intended to be used for U.S. and Euro Commercial Paper Programs back up pur- poses. The commitment fee on the facility is 0.045 % per annum. The most signifi cant existing funding programs include: Revolving Credit Facility of USD 2 000 million, maturing in 2012 Local commercial paper program in Finland, totaling EUR 750 million Euro Commercial Paper (ECP) program, totaling USD 500 million US Commercial Paper (USCP) program, totaling USD 500 million None of the above programs have been used to a signifi cant degree in 2005. Nokia’s international creditworthiness facilitates the effi cient use of international capital and loan markets. The ratings of Nokia from credit rating agencies have not changed during the year. The ratings as at December 31, 2005 were: Short-term Long-term Standard & Poor’s Moody’s Standard & Poor’s Moody’s A-1 P-1 A A1 Foreign exchange forward contracts 2 Currency options bought 2 Currency options sold 2 Interest rate swaps Cash settled equity options 3 Credit default swaps 4 2005 2004 29 991 284 165 50 150 – 10 745 715 499 – 237 200 1 2 3 4 Includes the gross amount of all notional values for contracts that have not yet been settled or cancelled. The amount of notional value outstanding is not necessarily a measure or indication of market risk, as the exposure of certain contracts may be offset by that of other contracts. As at December 31, 2005 notional amounts include contracts amounting to EUR 2.4 billion used to hedge the shareholders’ equity of foreign subsidiaries (December 31, 2004 EUR 1.6 billion). Cash settled equity options can be used to hedge risk relating to incentive programs and investment activities. Credit default swaps are used to selectively hedge counterparty risks involved in investment activities. Fair values of derivatives The net fair values of derivative fi nancial instruments at the balance sheet date were: EURm 2005 2004 Derivatives with positive fair value 1 Forward foreign exchange contracts 2 Currency options bought Cash settled equity options Derivatives with negative fair value 1 Forward foreign exchange contracts 2 Currency options written Credit default swaps 60 1 8 – 97 – – 278 14 5 – 89 – 11 – 2 Hazard risk Nokia strives to ensure that all fi nancial, reputation and other losses to the Group and our customers are minimized through preventive risk management mea- sures or purchase of insurance. Insurance is purchased for risks, which cannot be 1 2 Out of the forward foreign exchange contracts and currency options, fair value EUR – 27 million was designated for hedges of net investment in foreign subsidiaries as at December 31, 2005 (EUR 43 million at December 31, 2004) and reported within translation differences. Out of the foreign exchange forward contracts, fair value EUR 163 million was designated for cash flow hedges as at December 31, 2005 (EUR 14 million at December 31, 2004) and reported in fair value and other reserves. Notes to the consolidated fi nancial statement 37 Parent company fi nancial statements according to Finnish Accounting Standards Profit and loss accounts, FAS Balance sheets, FAS Financial year ended Dec. 31 Notes 2005 EURm 2004 EURm Financial year ended Dec. 31 Notes 2005 EURm 2004 EURm Net sales Cost of sales Gross margin Selling and marketing expenses Research and development expenses Administrative expenses Other operating expenses Other operating income 26 552 22 888 A S S E T S – 18 318 – 15 162 Fixed assets and other non-current assets 8 234 7 726 – 1 228 – 3 658 – 680 – 304 154 – 982 – 3 587 – 666 – 63 124 Intangible assets Capitalized development costs Intangible rights Other long-term expenses Tangible assets Operating profit 2, 3 2 518 2 552 Investments Financial income and expenses Income from long-term investments Dividend income from Group companies Dividend income from other companies Interest income from Group companies Other interest and fi nancial income Interest income from Group companies Interest income from other companies Other fi nancial income from other companies Exchange gains and losses Interest expenses and other fi nancial expenses Interest expenses to Group companies Interest expenses to other companies Other fi nancial expenses Financial income and expenses, total 723 1 3 221 4 2 – 241 – 159 – 5 – 5 544 418 23 6 169 – 21 117 – 65 – 2 – 10 677 Investments in subsidiaries Investments in associated companies Long-term loan receivables from Group companies Long-term loan receivables from other companies Other non-current assets 7 Current assets Inventories and work in progress Raw materials and supplies Work in progress Finished goods Prepaid inventories Receivables 4 5 6 6 260 55 4 319 – 328 59 – 387 – 3 565 3 597 7 45 63 5 5 140 38 7 3 685 3 787 146 223 315 – 684 102 84 284 2 472 1 588 1 632 633 1 523 Profit before extraordinary items and taxes 3 062 3 229 Trade debtors from Group companies Trade debtors from other companies Extraordinary items Group contributions Extraordinary items, total Profit before taxes Income taxes for the year from previous years Net profit See Notes to the financial statements of the parent company. Short-term loan receivables from Group companies 11 752 12 704 – 16 – 16 12 12 Short-term loan receivables from other companies Prepaid expenses and accrued income from Group companies 3 046 3 241 Prepaid expenses and accrued income from other companies – 648 24 2 422 – 826 19 2 434 Bank and cash 13 148 946 6 71 576 16 079 15 513 32 75 20 799 20 234 38 Nokia in 2005 Parent company Cash flow statements, FAS Financial year ended Dec. 31 Notes 2005 EURm 2004 EURm Financial year ended Dec. 31 Notes 2005 EURm 2004 EURm S H A R E H O L D E R S ’ E Q U I T Y A N D L I A B I L I T I E S Cash flow from operating activities Shareholders’ equity Share capital Share issue premium Treasury shares Retained earnings Net profi t for the year Liabilities Short-term liabilities 8 8 9 8, 9 Net profi t Adjustments, total 266 2 246 280 2 230 Net profi t before change in net working capital Change in net working capital – 3 614 – 2 012 Cash generated from operations 6 107 2 422 7 427 7 729 2 434 10 661 Interest received Interest paid Other fi nancial income and expenses Income taxes paid Cash fl ow before extraordinary items Extraordinary income and expenses 13 13 2 422 526 2 948 – 655 2 293 227 – 163 – 49 – 858 1 450 12 2 434 539 2 973 679 3 652 175 – 70 133 – 928 2 962 93 Current fi nance liabilities from Group companies 9 515 6 436 Current fi nance liabilities from other companies Advance payments from other companies Trade creditors to Group companies Trade creditors to other companies Accrued expenses and prepaid income to Group companies Accrued expenses and prepaid income to other companies – 121 918 1 170 2 2 133 634 902 76 1 646 13 372 1 390 9 573 Net cash from operating activities 1 462 3 055 Cash flow from investing activities Investments in shares Additions to capitalized development costs Capital expenditures Proceeds from sale of shares Long-term loans made to customers Proceeds from repayment and sale of long term loans receivable Proceeds from other long-term receivables Payments of short-term receivables Dividends received – 8 – 153 – 29 10 – 56 – 98 723 714 – 398 – 101 – 39 346 – 1 365 13 – 2 880 366 Net cash from (used in) investing activities 1 299 – 2 329 Cash flow from financing activities Proceeds from share issue Proceeds from borrowings Repayment of borrowings Purchase of treasury shares Dividends paid Support to the Foundation of Nokia Corporation 2 2 927 – 4 – 4 266 – 1 463 – – 3 333 – 23 – 2 660 – 1 399 – 5 Net cash used in financing activities – 2 804 – 754 See Notes to the financial statements of the parent company. See Notes to the financial statements of the parent company. Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period 20 799 20 234 Cash and cash equivalents at end of period – 43 75 32 – 28 103 75 Parent company 39 Notes to the fi nancial statements of the parent company 1. Accounting principles The Parent company Financial Statements are prepared according to Finnish Accounting Standards (FAS). See Note 1 to Notes to the consolidated fi nancial statements. 2. Personnel expenses EURm Wages and salaries Pension expenses Other social expenses Personnel expenses as per profi t and loss account Management remuneration 2005 1 288 179 82 1 549 2004 1 172 162 80 1 414 CEO and Chairman, and President The following table depicts the base salary and cash incentive payments informa- tion awarded to the Chief Executive Offi cer and Chairman, and the President of Nokia Corporation for fi scal years 2003 – 2005 as well as the share-based compensa- tion expense relating to equity-based awards, expensed by the Group. 2005 2004 2003 EUR Jorma Ollila CEO and Chairman Olli-Pekka Kallasvuo President since October 1, 2005 Pekka Ala-Pietilä President until October 1, 2005 1 Base salary Cash Share-based incentive compensation payments expense Base salary Cash Share-based incentive compensation payments expense Base salary Cash Share-based incentive compensation payments expense 1 500 000 3 212 037 3 389 994 1 475 238 1 936 221 2 109 863 1 400 000 2 253 192 1 028 775 623 524 947 742 666 313 584 000 454 150 394 979 575 083 505 724 154 316 717 000 946 332 745 733 717 000 479 509 493 556 711 279 520 143 218 615 1 Pekka Ala-Pietilä served as the President of the Group and member of the Group Executive Board until he resigned from these positions effective October 1, 2005. As of this date Mr. Ala-Pietilä held the role of Executive Advisor until January 31, 2006, when he ceased employment with the Group. For 2006, based on these advisory services, Mr. Ala-Pietilä received a total payment of EUR 101 717. Based on the service contract, Pekka Ala-Pietilä is entitled to receive a payment of EUR 956 000 in 2006 for his commitments during 2006. Total remuneration of the Group Executive Board awarded for the fi scal years ended 2003 – 2005 was EUR 14 684 602 in 2005 (EUR 13 594 942 in 2004 and EUR 10 859 644 in 2003), which consisted of base salaries and cash incentive payments. Total share- based compensation expense relating to equity-based awards, expensed by the Group was EUR 8 295 227 in 2005 (EUR 4 763 545 in 2004 and EUR 1 776 736 in 2003). Board of Directors The following table depicts the annual remuneration structure paid to the members of our Board of Directors, as resolved by the Annual General Meetings in the respec- tive years. Since the fi scal year 1999, approximately 60% of each Board member’s annual fee has been paid in cash with the balance in Nokia Corporation shares acquired from the market. Chairman Vice Chairman Other members Gross Shares Gross Shares Gross Shares annual fee received 1 annual fee received 1 annual fee received 1 EUR EUR EUR EUR EUR EUR Additional annual fees 150 000 4 032 125 000 3 360 100 000 2 688 Year 2003 2004 150 000 4 834 125 000 4 028 100 000 3 223 2005 165 000 5 011 137 500 4 175 110 000 3 340 1 As part of the gross annual fee for that year. 40 Nokia in 2005 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000; Each other member of the Audit Committee, EUR 10 000 Notes to the financial statements of the parent company The following table depicts the total annual remuneration paid to the members of our Board of Directors, as resolved by the Annual General Meetings in the respective years. Gross annual fee * Simon Beresford-Wylie participates in the Nokia International Employee Benefi t Plan (NIEBP). The NIEBP is a defi ned contribution retirement arrangement provided to some Nokia employees on international assignments. The contributions to NIEBP are funded two-thirds by Nokia and one-third by the employee. Because Mr. Beresford-Wylie also participates in the Finnish TEL system, the company contri- bution to NIEBP is 1.3 % of annual earnings. 2005 EUR 2004 EUR 2003 EUR Personnel average 165 000 150 000 150 000 Production Marketing R&D Administration 150 000 2 150 000 2 100 000 100 000 Personnel, December 31 162 500 2 120 000 3 110 000 110 000 135 000 4 110 000 110 000 120 000 5 120 000 6 – – 100 000 125 000 4 – 100 000 100 000 100 000 100 000 125 000 – 100 000 100 000 100 000 Board of Directors Jorma Ollila Chairman and CEO 1 Paul Collins Vice Chairman Georg Ehrnrooth Daniel R. Hesse Dr. Bengt Holmström Per Karlsson Edouard Michelin Dame Marjorie Scardino Vesa Vainio Arne Wessberg Former Board Member: Robert F.W. van Oordt – – 125 000 7 In addition to the fee as the Chairman of the Board, Jorma Ollila receives compensation for his services as the CEO of Nokia Corporation. This annual cash compensation is presented in the table “CEO and Chairman, and President” above. The 2005 fee of Paul Collins amounts to a total of EUR 162 500, consisting of a fee of EUR 137 500 for services as Vice Chairman of the Board and EUR 25 000 for services as Chairman of the Personnel Committee. Each 2004 and 2003 fees of Mr. Collins amounted to a total of EUR 150 000, consisting of a fee of EUR 125 000 for services as Vice Chairman of the Board and EUR 25 000 for services as Chair- man of the Personnel Committee. As part of the total remuneration, Mr. Collins has received a total of 4 935 Nokia shares in 2005, 4 834 Nokia shares in 2004 and 4 032 Nokia shares in 2003. The 2005 fee of Georg Ehrnrooth amounts to a total of EUR 120 000 consisting of a fee of EUR 110 000 for services as a member of the Board and EUR 10 000 for services as a member of the Audit Commit- tee. As part of the total remuneration, Mr. Ehrnrooth has received a total of 3 644 Nokia shares. The 2005 fee of Per Karlsson amounts to a total of EUR 135 000, consisting of a fee of EUR 110 000 for services as Member of the Board and EUR 25 000 for services as Chairman of the Audit Com- mittee. The 2004 fee of Mr. Karlsson amounted to a total of EUR 125 000, consisting of a fee of EUR 100 000 for services as member of the Board and EUR 25 000 for services as Chairman of the Audit Committee. As part of the total remuneration, Mr. Karlsson has received a total of 4 100 Nokia shares in 2005 and 4 029 Nokia shares in 2004. The 2005 fee of Vesa Vainio amounts to a total of EUR 120 000 consisting of a fee of EUR 110 000 for services as a member of the Board and EUR 10 000 for services as a member of the Audit Committee. As part of the total remuneration, Mr. Vainio has received a total of 3 644 Nokia shares. The 2005 fee of Arne Wessberg amounts to a total of EUR 120 000 consisting of a fee of EUR 110 000 for services as a member of the Board and EUR 10 000 for services as a member of the Audit Commit- tee. As part of the total remuneration, Mr. Wessberg has received a total of 3 644 Nokia shares. 1 2 3 4 5 6 7 * 3. Depreciation and amortization EURm 2005 2004 Depreciation and amortization by asset class category Intangible assets Capitalized development costs Intangible rights Tangible assets Total Depreciation and amortization by function R&D Production Selling, marketing and administration Total 221 28 – 249 232 1 16 249 290 31 – 321 298 – 23 321 4. Intangible assets EURm 2005 2004 Capitalized development costs Acquisition cost January 1 Additions Disposals Accumulated amortization December 31 Net carrying amount December 31 The 2003 fee of Robert F.W. van Oordt amounted to a total of EUR 125 000, consisting of a fee of EUR 100 000 for services as Member of the Board and EUR 25 000 for services as Chairman of the Audit Committee. As part of the total remuneration, Mr. van Oordt received a total of 3 360 Nokia shares. Intangible rights Acquisition cost January 1 In case a Board member’s gross annual fee does not include any additional annual fees, the number of shares received as part of gross annual fee for that year is presented in the “Shares received” column on the table on page 40. Additions Disposals Retirement benefi ts of certain Group Executive Board Members Jorma Ollila and Olli-Pekka Kallasvuo can as part of their service contract retire at the age of 60 with full retirement benefi t, should they be employed by Nokia at the time. The full retirement benefi t is calculated as if the executive had continued his service with Nokia through the statutory retirement age of 65. Mr. Ollila’s service contract will terminate as of June 1, 2006. Following the current contract, he will not be eli- gible to receive any additional retirement benefi ts from Nokia after that date. Pekka Ala-Pietilä had an equal retirement arrangement during his employment at Nokia and he will not receive any additional retirement benefi ts from Nokia after termina- tion of employment. Hallstein Moerk, following his arrangement with a previous employer, has a retirement benefi t of 65 % of his pensionable salary beginning at the age of 62. Early retirement is possible at the age of 55 with reductions in benefi ts. Accumulated amortization December 31 Net carrying amount December 31 Other intangible assets Acquisition cost January 1 Additions Accumulated amortization December 31 Net carrying amount December 31 2005 5 984 1 326 13 149 3 152 23 611 23 509 2004 5 029 1 609 12 861 3 292 22 791 22 990 1 394 153 – 30 1 416 101 – 123 – 1 257 – 1 066 260 328 290 25 – 4 – 256 55 3 4 – 3 4 256 40 – 4 – 233 59 3 – – 3 – Notes to the fi nancial statements of the parent company 41 Notes to the financial statements of the parent company 5. Tangible assets At the end of 2005 and 2004 the parent company had no tangible assets. These assets were leased from Nokia Asset Management Oy, a company wholly owned by Nokia Corporation. 2005 2004 3 597 65 – 97 3 565 5 2 – 7 3 540 68 – 11 3 597 4 1 – 5 2005 2004 7 4 – 6 5 – 5 17 334 – 344 7 – 7 6. Investments EURm Investments in subsidiaries Acquisition cost January 1 Additions Disposals Net carrying amount December 31 Investments in associated companies Acquisition cost January 1 Additions Disposals Net carrying amount December 31 7. Other non-current assets EURm Investments in other shares Acquisition cost January 1 Additions Disposals Net carrying amount December 31 Other investments 8. Shareholders’ equity Parent Company, EURm Balance at December 31, 2002 Share issue Acquisitions of treasury shares Dividend Net profi t Balance at December 31, 2003 Share issue Cancellation of treasury shares Acquisitions of treasury shares Dividend Support to the Foundation of Nokia Corporation Net profi t Balance at December 31, 2004 Share issue Cancellation of treasury shares Acquisitions of treasury shares Dividend Adoption of IAS 39(R) Net profi t Balance at December 31, 2005 42 Nokia in 2005 Share capital 287 1 Share issue premium 2 182 40 Treasury shares Retained earnings Total – 9 401 11 870 – 1 351 288 2 222 – 1 351 – 8 8 1 999 – 2 660 280 2 230 – 2 012 – 14 2 14 2 664 – 4 266 266 2 246 – 3 614 – 1 339 3 070 11 132 – 1 999 – 1 399 – 5 2 434 10 163 – 2 664 – 1 463 71 2 422 8 529 41 – 1 351 – 1 339 3 070 12 291 – – – 2 660 – 1 399 – 5 2 434 10 661 2 – – 4 266 – 1 463 71 2 422 7 427 Notes to the financial statements of the parent company 9. Distributable earnings EURm Retained earnings from previous years Net profi t for the year Retained earnings, total Treasury shares Distributable earnings, December 31 14. Principal Nokia Group companies on December 31, 2005 See Note 37 to Notes to the consolidated fi nancial statements. 15. Nokia Shares and Shareholders See Nokia Shares and Shareholders pages 44 – 47. 2005 6 107 2 422 8 529 – 3 614 4 915 2004 7 729 2 434 10 163 – 2 012 8 151 10. Commitments and contingencies EURm 2005 2004 Contingent liabilities on behalf of Group companies Guarantees for loans Leasing guarantees Other guarantees Contingent liabilities on behalf of other companies Guarantees for loans Other guarantees 125 357 274 – 1 173 246 244 3 1 11. Leasing contracts At December 31, 2005 the leasing contracts of the Parent Company amounted to EUR 464 million (EUR 491 million in 2004), of which EUR 425 million in 2005 relate to Group internal agreements. EUR 445 million will expire in 2006 (EUR 473 million in 2005). 12. Related party transactions Nokia Pension Foundation is a separate legal entity that manages and holds in trust the assets of the Company’s Finnish employees benefi t plans; these assets include 0.009 % of Nokia shares. There were no loans granted to the members of the Group Executive Board and Board of Directors at December 31, 2005. 13. Notes to cash flow statements EURm Adjustments for: Depreciation Income taxes Financial income and expenses Impairment of fi xed assets Impairment of non-current available-for-sale investments Other operating income and expenses Adjustments, total Change in net working capital Short-term trade receivables, increase (–), decrease (+) Inventories, increase (–), decrease (+) Interest-free short-term liabilities, increase (+), decrease (–) Change in net working capital 2005 2004 250 624 – 544 – – 5 201 526 – 1 471 – 212 1 028 – 655 321 807 – 677 102 – – 14 539 682 – 67 64 679 Notes to the fi nancial statements of the parent company 43 Nokia shares and shareholders Shares and share capital Nokia has one class of shares. Each Nokia share entitles the holder to one (1) vote at General Meetings of Nokia. The par value of the share is EUR 0.06. The minimum share capital stipulated in the Articles of Association is EUR 170 million and the maximum share capital EUR 680 million. The share capital may be in- creased or reduced within these limits without amending the Articles of Association. On December 31, 2005, the share capital of Nokia Corporation was EUR 266 033 192.40 and the total number of shares was 4 433 886 540. On December 31, 2005, the total number of shares included 261 511 283 shares owned by the Group companies with an aggregate par value of EUR 15 690 676.98 representing approximately 5.9 % of the share capital and the total voting rights. Share capital and shares Dec. 31, 2005 Share capital, EURm Shares (1 000, par value EUR 0.06) Shares owned by the Group (1 000) 2005 266 2004 280 2003 288 2002 287 2001 284 4 433 887 4 663 761 4 796 292 4 787 907 4 737 530 261 511 176 820 96 024 1 145 1 228 Number of shares excluding shares owned by the Group (1 000) 4 172 376 4 486 941 4 700 268 4 786 762 4 736 302 Average number of shares excluding shares owned by the Group during the year (1 000), basic Average number of shares excluding shares owned by the Group during the year (1 000), diluted Number of registered shareholders 1 1 Each account operator is included in the figure as only one registered shareholder. Key ratios December 31, 2005, IFRS 1 (calculation see page 50) Earnings per share (for profit attributable to the equity holders of the parent), EUR Earnings per share, basic Earnings per share, diluted P/E Ratio (Nominal) dividend per share, EUR Total dividends paid, EURm 2 Payout ratio Dividend yield, % Shareholders’ equity per share, EUR Market capitalization, EURm 3 Board’s proposal. 2004 and 2003 financial accounts now reflect the retrospective implementation of IFRS 2 and IAS 39(R). 2002 and 2001 data has not been adjusted from that reported in prior years, and there- fore is not always comparable with data for the years 2003 to 2005. Calculated for all the shares of the company as of the applicable year-end. Shares owned by the Group companies are not included. * 1 2 3 4 365 547 4 593 196 4 761 121 4 751 110 4 702 852 4 371 239 4 600 337 4 761 160 4 788 042 4 787 219 126 352 142 095 133 991 129 508 116 352 2005 2004 As revised 2003 As revised 2002 2001 0.83 0.83 18.61 0 37 * 1 641 * 0 45 * 2.4 2.91 0.69 0.69 16.84 0.33 1 539 0.48 2.8 3.17 0.74 0.74 18.53 0.30 1 439 0.41 2.2 3.22 0.71 0.71 21.34 0.28 1 341 0.39 1.8 2.98 0.47 0.46 61.60 0.27 1 279 0.57 0.9 2.58 64 463 52 138 65 757 72 537 137 163 Splits of the par value of the Nokia share Par value before Split ratio Par value after Effective date 1986 1995 1998 1999 2000 FIM 100 (EUR 16.82) FIM 20 (EUR 3.36) FIM 5 (EUR 0.84) FIM 2 5 (EUR 0.42) EUR 0.24 5:1 4:1 2:1 2:1 4:1 FIM 20 (EUR 3.36) December 31, 1986 FIM 5 (EUR 0.84) FIM 2 5 (EUR 0.42) EUR 0.24 1 EUR 0.06 April 24, 1995 April 16, 1998 April 12, 1999 April 10, 2000 1 At the same time with a bonus issue of EUR 0.03 per each share of a par value of EUR 0.24. 44 Nokia in 2005 Nokia shares and shareholders Authorizations Authorization to increase the share capital The Board of Directors had been authorized by Nokia shareholders at the Annual General Meeting held on March 25, 2004 to decide on an increase of the share capital by a maximum of EUR 55 500 000 offering a maximum of 925 000 000 new shares. In 2005, the Board of Directors did not increase the share capital on the basis of this authorization. The authorization expired on March 25, 2005. At the Annual General Meeting held on April 7, 2005 Nokia shareholders authorized the Board of Directors to decide on an increase of the share capital by a maximum of EUR 53 160 000 within one year from the resolution of the Annual General Meeting. The in- crease of the share capital may consist of one or more issues offering a maximum of 886 000 000 new shares with a par value of EUR 0.06 each. The share capital may be increased in deviation from the shareholders’ pre-emptive rights for share subscription provided that from the company’s perspective important fi nan- cial grounds exist such as fi nancing or carrying out of an acquisition or another arrangement or granting incentives to selected members of the personnel. In 2005, the Board of Directors did not increase the share capital on the basis of this authorization. The authori- zation is effective until April 7, 2006. At the end of 2005, the Board of Directors had no other authorizations to issue shares, convertible bonds, warrants or stock options. The Board of Directors will propose to the Annual General Meeting convening on March 30, 2006 that the Board of Directors be authorized to resolve to increase the share capital of the company by issuing new shares, stock options or convertible bonds in one or more issues. The increase of the share capital through issuance of new shares, subscription of shares pursu- ant to stock options and conversion of convertible bonds into shares, may amount to a maximum of EUR 48 540 000 in total. As a result of share issuance, subscription of shares pursuant to stock options and conversion of convertible bonds into shares an aggre- gate maximum of 809 000 000 new shares with a par value of EUR 0.06 may be issued. The authorization is proposed to be effective until March 30, 2007, or in the event that the new Companies Act has been approved by the time of the Annual General Meeting, and enters into force latest on March 30, 2007, this authorization is proposed to be effective until June 30, 2007. Other authorizations At the Annual General Meeting held on March 25, 2004, Nokia shareholders authorized the Board of Directors to repurchase a maximum of 230 million Nokia shares. In 2005 Nokia repurchased 54 million Nokia shares on the basis of this authorization. At the Annual General Meeting held on April 7, 2005, Nokia shareholders authorized the Board of Directors to repurchase a maximum of 443 200 000 Nokia shares, representing less than 10 % of the share capital and the total voting rights, and to resolve on the disposal of a maximum of 443 200 000 Nokia shares. In 2005, a total of 261 010 000 Nokia shares were repurchased under this buy-back authorization, as a result of which the unused authorization amount- ed to 182 190 000 shares on December 31, 2005. No shares were disposed of in 2005 under the respec- tive authorization. The shares may be repurchased under the buy-back authorization in order to carry out the company’s stock repurchase plan. In addition, the shares may be repurchased in order to develop the capital structure of the company, to fi nance or carry out acquisitions or other arrangements, to settle the company’s equity-based incentive plans, to be transferred for other purposes, or to be cancelled. The authorization to dispose of the shares may be carried out pursuant to terms determined by the Board in connection with acquisitions or in other arrange- ments or for incentive purposes to selected members of the personnel. The Board may resolve to dispose the shares in another proportion than that of the shareholders’ pre-emptive rights to the company’s shares, provided that from the company’s perspective important fi nancial grounds exist for such disposal. These authorizations are effective until April 7, 2006. The Board of Directors will propose to the Annual General Meeting convening on March 30, 2006 that the Board of Directors be authorized to repurchase a maximum of 405 million Nokia shares by using unrestricted shareholders’ equity. Further, the Board of Directors will propose that the Annual General Meeting authorize the Board of Directors to resolve to dispose a maximum of 405 million Nokia shares. These authorizations are proposed to be effective until March 30, 2007, or in the event that the new Companies Act has been approved by the time of the Annual General Meeting, and enters into force latest on March 30, 2007, these authorizations are proposed to be effective until June 30, 2007. Share and bonus issues 2001 – 2005 Year 2001 Type of Issue Nokia Stock Option Plan 1995 Nokia Stock Option Plan 1997 Nokia Stock Option Plan 1999 Share issue to stockholders of Amber Networks, Inc. Total 2002 Nokia Stock Option Plan 1997 Nokia Stock Option Plan 1999 Total 2003 Nokia Stock Option Plan 1997 Share issue to stockholders of Eizel Technologies Inc. Total 2004 Nokia Stock Option Plan 1999 Total 2005 Nokia Stock Option Plan 2003 2Q Nokia Stock Option Plan 2003 3Q Nokia Stock Option Plan 2004 2Q Nokia Stock Option Plan 2004 3Q Total Subscription price or amount of bonus issue EUR Number of new shares (1 000) Date of payment Net proceeds EURm New share capital EURm 1.77 3.23 16.89 20.77 3.23 16.89 3.23 14.76 16.89 14.95 12.71 11.79 9.44 1 682 20 993 382 18 329 41 386 50 357 20 50 377 7 160 1 225 8 385 5 5 61 6 55 3 125 2001 2001 2001 2001 2002 2002 2003 2003 2004 2005 2005 2005 2005 2.97 67.81 6.46 380.72 457.96 162.50 0.33 162.83 23.11 18.08 41.19 0.09 0.09 0.91 0.08 0.65 0.02 1.66 0.10 1.26 0.02 1.10 2.48 3.02 0.00 3.02 0.43 0.07 0.50 0.00 0.00 0.00 0.00 0.00 0.00 0.01 Nokia shares and shareholders 45 Nokia shares and shareholders Reductions of share capital Type of reduction Cancellation of shares Cancellation of shares Cancellation of shares Share turnover (all stock exchanges) Number of shares (1 000 par value EUR 0.06) Amount of reduction of the share capital EURm Amount of reduction of the restricted capital EURm Amount of reduction of the retained earnings EURm 69 132 536 230 000 0.004 7.95 13.80 – – – – – – Year 2001 2004 2005 Share turnover (1 000) Total number of shares (1 000) % of total number of shares 2005 12 977 232 4 433 887 293 2004 2003 14 091 430 4 663 761 302 11 788 172 4 796 282 246 2002 12 926 683 4 787 907 270 2001 11 457 748 4 737 530 242 Share prices, EUR (Helsinki Stock Exchange) 2005 2004 2003 2002 2001 Low/high Average 1 Year-end 10.75/15.75 8.97/18.79 11.44/16.16 11.10/29.45 14.35/46.50 13.20 15.45 12.84 11.62 14.12 13.71 18.13 15.15 24.57 28.96 1 Calculated by weighting average price with daily volumes. Share prices, USD (New York Stock Exchange) ADS Low/high Average 1 Year-end 2005 2004 2003 2002 2001 13.92/18.62 11.03/23.22 12.67/18.45 10.76/26.90 12.95/44.69 16.39 18.30 15.96 15.67 15.99 17.00 16.88 15.50 24.84 24.53 1 Calculated by weighting average price with daily volumes. Shareholders, December 31, 2005 Shareholders registered in Finland represent 14.62 % and shareholders registered in the name of a nominee represent 85.38 % of the total number of shares of Nokia Corporation. The number of registered shareholders was 126 352 on December 31, 2005. Each account operator (23) is included in this fi gure as only one registered shareholder. Largest shareholders registered in Finland, December 31, 2005 (excluding nominee registered shares and shares owned by Nokia Corporation 1) Svenska Litteratursällskapet i Finland rf Sigrid Jusélius Foundation Ilmarinen Mutual Pension Insurance Company BNP Arbitrage Varma Mutual Pension Insurance Company The State Pension Fund The Finnish Cultural Foundation The Social Insurance Institution of Finland The Finnish National Fund for Research and Development (Sitra) Samfundet Folkhälsan i Svenska Finland rf 1 2 Nokia Corporation owned 261 010 000 shares as of December 31, 2005. 261 511 283 shares owned by the Group companies as of December 31, 2005 do not carry voting rights. 46 Nokia in 2005 Nominee registered shareholders include holders of American Depositary Re- ceipts (ADR) and Svenska Depåbevis (SDB). As of December 31, 2005 ADRs represented 28.55 % and SDBs 2.80 % of the total number of shares in Nokia. Total number of shares (1 000) % of all the shares % of voting rights 2 20 611 15 300 14 347 9 205 7 400 6 000 5 049 4 289 3 885 3 708 0.46 0.35 0.32 0.21 0.17 0.14 0.11 0.10 0.09 0.08 0.49 0.37 0.34 0.22 0.18 0.14 0.12 0.10 0.09 0.09 Nokia shares and shareholders Total number of shares 2 633 231 23 369 330 65 126 019 97 974 123 55 476 904 23 971 760 61 302 725 4 104 032 448 4 433 886 540 % of share capital 0.06 0.53 1.47 2.21 1.25 0.54 1.38 92.56 100.00 Breakdown of share ownership, Dec. 31, 2005 1 By number of shares owned Number of shareholders % of shareholders 1 – 100 101 – 1 000 1 001 – 10 000 10 001 – 100 000 100 001 – 500 000 500 001 – 1 000 000 1 000 001 – 5 000 000 Over 5 000 000 Total By nationality, % Non-Finnish shareholders Finnish shareholders Total 43 207 58 260 20 747 3 782 278 35 29 14 126 352 34.20 46.11 16.42 2.99 0.22 0.03 0.02 0.01 100.00 Shares 85.38 14.62 100.00 By shareholder category (Finnish shareholders), % Shares Corporations Households Financial and insurance institutions Non-profi t organizations General government Total 6.43 4.15 0.74 2.10 1.20 14.62 1 Please note that the breakdown covers only shareholders registered in Finland, and each account operator (23) is included in the number of shareholders as only one registered shareholder. Due to this, the breakdown is not illustrative to the entire shareholder base of Nokia. Shares and stock options owned by the members of the Board of Directors and the Group Executive Board Members of the Board of Directors and the Group Executive Board owned on Decem- ber 31, 2005 an aggregate of 632 733 shares representing approximately 0.02 % of the aggregate number of shares and voting rights. They also owned stock options, which, if exercised in full, would be exercisable for 6 626 157 shares representing approximately 0.16 % of the total number of shares and voting rights on Decem- ber 31, 2005. Nokia shares and shareholders 47 Nokia Group 2001 – 2005, IFRS Profit and loss account, EURm Net sales Cost and expenses Operating profi t Share of results of associated companies Financial income and expenses Profi t before tax Tax Profi t before minority interests Minority interests 2005 34 191 – 29 552 4 639 10 322 4 971 – 1 281 3 690 – 74 Profi t attributable to equity holders of the parent 3 616 Balance sheet items, EURm Fixed assets and other non-current assets Current assets Inventories Accounts receivable and prepaid expenses Available-for-sale investments Total cash and other liquid assets Total equity Capital and reserves attributable to equity holders of the parent Minority interests Long-term liabilities Long-term interest-bearing liabilities Deferred tax liabilities Other long-term liabilities Current liabilities Short-term borrowings Current portion of long-term loans Accounts payable Accrued expenses Provisions Total assets 3 347 18 951 1 668 7 373 – 9 910 12 360 12 155 205 268 21 151 96 9 670 377 – 3 494 3 320 2 479 22 298 2004 As revised* 2003 As revised* 2002** 2001** 29 371 – 25 045 4 326 – 26 405 4 705 – 1 446 3 259 – 67 3 192 3 161 19 508 1 305 6 406 255 11 542 14 399 14 231 168 294 19 179 96 7 976 215 – 2 669 2 604 2 488 22 669 29 533 – 24 573 4 960 – 18 352 5 294 – 1 697 3 597 -54 3 543 3 837 20 083 1 169 6 802 816 11 296 15 312 15 148 164 328 20 241 67 8 280 387 84 2 919 2 468 2 422 23 920 30 016 – 25 236 4 780 – 19 156 4 917 – 1 484 3 433 – 52 3 381 5 742 17 585 1 277 6 957 – 9 351 14 454 14 281 173 461 187 207 67 8 412 377 – 2 954 2 611 2 470 23 327 31 191 – 27 829 3 362 – 12 125 3 475 – 1 192 2 283 – 83 2 200 6 912 15 515 1 788 7 602 – 6 125 12 401 12 205 196 460 207 177 76 9 566 831 – 3 074 3 477 2 184 22 427 * ** 2004 and 2003 financial statements now reflect the retrospective implementation of IFRS 2 and IAS 39(R). 2002 and 2001 data has not been adjusted from that reported in prior years, and therefore is not always comparable with data for years 2003 to 2005. 48 Nokia in 2005 Key ratios and economic indicators * Net sales, EURm Change, % Exports and foreign subsidiaries, EURm Salaries and social expenses, EURm 1 Operating profi t, EURm % of net sales Financial income and expenses, EURm % of net sales Profi t before tax, EURm % of net sales Profi t from continuing operations, EURm % of net sales Taxes, EURm Dividends, EURm Capital expenditure, EURm % of net sales Gross investments***, EURm % of net sales R&D expenditure, EURm % of net sales Average personnel Non-interest bearing liabilities, EURm Interest-bearing liabilities, EURm Return on capital employed, % Return on equity, % Equity ratio, % Net debt to equity, % 2005 34 191 16.4 33 860 3 877 4 639 13.6 322 0.9 4 971 14.5 3 616 10.6 1 281 1 641 ** 607 1.8 870 3.1 3 825 11.2 56 896 9 389 398 36.7 27.4 56.1 – 77 Nokia Group 2001 – 2005, IFRS 2004 As revised * 2003 As revised * 2002 ** 2001 ** 29 371 –0.5 29 020 3 492 4 326 14.7 405 1.4 4 705 16.0 3 192 10.9 1 446 1 539 548 1.9 1 197 4.1 3 776 12.9 53 511 7 857 234 31.5 21.7 64.4 –79 29 533 –1.6 29 186 3 067 4 960 16.8 352 1.2 5 294 17.9 3 543 12.0 1 699 1 439 432 1.5 1 013 3.4 3 788 12.8 51 605 8 117 491 34.3 24.1 64.8 –71 30 016 –3.8 29 663 3 140 4 780 15.9 156 0.5 4 917 16.4 3 381 11.3 1 484 1 340 432 1.4 966 3.2 3 052 10.2 52 714 8 309 564 35.3 25.5 62.5 –61 31 191 2.7 30 738 3 235 3 362 10.8 125 0.4 3 475 11.1 2 200 7.1 1 192 1 279 1 041 3.3 2 149 6.9 2 985 9.6 57 716 8 988 1 038 27.9 19.1 56.0 –41 * 2004 and 2003 financial accounts now reflect the retrospective implementation of IFRS 2 and IAS 39(R). 2002 and 2001 data has not been adjusted from that reported in prior years, and therefore is not always comparable with data for the years 2003 to 2005. ** Board’s proposal *** Includes acquisitions, investments in shares and capitalized development costs. 1 Includes share-based compensation. See Note 5. Calculation of key ratios, see page 50. Nokia Group 2001 – 2005, IFRS 49 Calculation of key ratios Key ratios under IFRS Operating profi t Profi t after depreciation Shareholders’ equity Share capital + reserves attributable to equity holders of the parent Earnings per share Profi t attributable to equity holders of the parent Average of adjusted number of shares during the year P/E ratio Adjusted share price, December 31 Earnings per share Dividend per share Nominal dividend per share Return on shareholders’ equity, % Profi t attributable to the equity holders of the parent Average capital and reserves attributable to equity holders of the parent during the year Equity ratio, % Capital and reserves attributable to equity holders of the parent + minority shareholders’ interests Total assets – advance payments received Net debt to equity (gearing), % Long-term interest-bearing liabilities (including the current portion thereof) + short-term borrowings – cash and other liquid assets Capital and reserves attributable to the equity holders of the parent + minority shareholders’ interests The adjustment coeffi cients of the share issues that have taken place during or after the year in question Year-end currency rates 2005 USD GBP SEK JPY EUR = 1.1972 0.6784 9.4326 139.29 Payout ratio Dividend per share Earnings per share Dividend yield, % Nominal dividend per share Share price Shareholders’ equity per share Capital and reserves attributable to equity holders of the parent Adjusted number of shares at year end Market capitalization Number of shares x share price per share class Adjusted average share price Amount traded, in EUR, during the period Adjusted number of shares traded during the period Share turnover, % Number of shares traded during the period Average number of shares during the period Return on capital employed, % Profi t before taxes + interest and other net fi nancial expenses Average capital and reserves attributable to equity holders of the parent + short-term borrowings + long-term interest-bearing liabilities (including the current portion thereof) + minority shareholders’ interests 50 Nokia in 2005 Proposal by the Board of Directors to the Annual General Meeting The distributable earnings in the balance sheet of the Group amount to EUR 9 453 million and those of the Company to EUR 4 915 million. The Board proposes that from the funds at the disposal of the Annual General Meeting, a dividend of EUR 0.37 per share is to be paid out on a total of 4 433 886 540 shares, amounting to EUR 1 641 million. Espoo, January 26, 2006 Jorma Ollila Chairman and CEO Paul J. Collins Georg Ehrnrooth Daniel R. Hesse Bengt Holmström Per Karlsson Edouard Michelin Marjorie Scardino Vesa Vainio Arne Wessberg Olli-Pekka Kallasvuo President and COO Proposal by the Board of Directors to the Annual General Meeting 51 Auditors’ report Translation To the shareholders of Nokia Oyj We have audited the accounting records, the fi nancial statements and the admin- istration of Nokia Oyj for the period 1.1. – 31.12.2005. The Board of Directors and the Managing Director have prepared the report of the Board of Directors and the con- solidated fi nancial statements prepared in accordance with International Financial Reporting Standards as adopted by the EU and the parent company’s fi nancial state- ments prepared in accordance with prevailing regulations in Finland, that includes parent company’s balance sheet, income statement, cash fl ow statement and the notes to the fi nancial statements. Based on our audit, we express an opinion on the consolidated fi nancial statements, the parent company’s fi nancial statements and on the administration of the parent company. We have conducted the audit in accordance with Finnish Standards on Auditing. Those standards require that we perform the audit to obtain reasonable assurance about whether the fi nancial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the fi nancial statements, assessing the accounting principles used and signifi cant estimates made by the management as well as evaluating the overall fi nancial state- ment presentation. The purpose of our audit of administration is to examine that the members of the Board of Directors and the Managing Director of the parent company have legally complied with the rules of the Companies’ Act. Consolidated fi nancial statements In our opinion the consolidated fi nancial statements give a true and fair view, as re- ferred to in the International Financial Reporting Standards as adopted by the EU and defi ned in the Finnish Accounting Act, of the consolidated results of operations as well as of the fi nancial position. The consolidated fi nancial statements can be adopted. Parent company’s fi nancial statements and administration In our opinion the parent company’s fi nancial statements have been prepared in ac- cordance with the Finnish Accounting Act and other rules and regulations governing the preparation of fi nancial statements in Finland. The fi nancial statements give a true and fair view, as defi ned in the Finnish Accounting Act, of the parent company’s result of operations as well as of the fi nancial position. The fi nancial statements can be adopted and the members of the Board of Directors and the Managing Director of the parent company can be discharged from liability for the period audited by us. The proposal by the Board of Directors regarding distributable funds is in compliance with the Companies’ Act. Helsinki, 26 January 2006 PricewaterhouseCoopers Oy Authorized Public Accountants Eero Suomela APA 52 52 Nokia in 2005 Nokia in 2005 Additional information US GAAP .................................................................................................................................................... 54 Critical accounting policies ................................................................................................................ 59 Group Executive Board ........................................................................................................................ 62 Board of Directors ................................................................................................................................. 64 Risk factors .............................................................................................................................................. 66 Corporate governance ......................................................................................................................... 68 Investor information ............................................................................................................................ 83 Contact information ............................................................................................................................. 84 US GAAP Differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles The Group’s consolidated fi nancial statements are prepared in accordance with International Financial Reporting Standards, which differ in certain respects from accounting principles generally accepted in the United States of America (US GAAP). The principal differences between IFRS and US GAAP are presented below together with explanations of certain adjustments that affect consolidated net income and total shareholders’ equity under US GAAP as of and for the years ended December 31: EURm Reconciliation of profit attributable to equity holders of the parent under IFRS to net income under US GAAP: Profi t attributable to equity holders of the parent reported under IFRS US GAAP adjustments: Pension expense Development costs Social security cost on share-based payments Share-based compensation expense Cash fl ow hedges Sale and leaseback transaction Amortization of identifi able intangible assets acquired Impairment of identifi able intangible assets acquired Amortization of goodwill Impairment of goodwill Loss on disposal Deferred tax effect of US GAAP adjustments 2005 2004 2003 As revised 1 As revised 1 3 616 3 192 3 543 – 3 10 12 – 39 – 12 – 4 – – – – – 9 11 – 42 – 6 39 31 – – 11 – 47 106 – – – 3 – 12 322 – 21 32 19 – – 22 – 162 151 – – 77 Net income under US GAAP 3 582 3 343 4 097 Presentation of comprehensive income under US GAAP: Other comprehensive income (+)/loss (–): Foreign currency translation adjustment 272 – 67 – 273 Additional minimum liability, net of tax of EUR 5 million in 2005 and EURm 2005 2004 Reconciliation of total equity under IFRS to total shareholders’ equity under US GAAP: Total equity reported under IFRS Less minority interests 12 360 – 205 14 399 – 168 Capital reserves attributable to equity holders of the parent under IFRS 12 155 14 231 US GAAP adjustments: Pension expense Additional minimum liability Development costs – 52 – 13 – 47 Marketable securities and unlisted investments 17 Social security cost on share-based payments 20 Deferred compensation Share issue premium Share-based compensation Acquisition purchase price Sale and leaseback transaction Amortization of identifi able intangible assets acquired Impairment of identifi able intangible assets acquired Amortization of goodwill Impairment of goodwill Loss on disposal Translation of goodwill Deferred tax effect of US GAAP adjustments – 135 – 135 2 – 4 – 62 – 47 502 255 – 9 – 242 83 – 49 – – 57 35 15 – 50 146 – 96 2 – – 62 – 47 502 255 – – 319 70 EUR – 2 million in 2003 – 8 – 3 Total shareholders’ equity under US GAAP 12 558 14 576 Net losses on cash fl ow hedges, net of tax of EUR 43 million in 2005 (EUR 8 million in 2004 and EUR 4 million in 2003) – 122 – 23 – 4 Earnings per share under US GAAP: EURm 2005 2004 2003 Earnings per share (net income): Basic Diluted Average number of shares (1 000 shares): 0.82 0.82 0.73 0.73 0.86 0.86 Basic Diluted 4 365 547 4 593 196 4 761 121 4 371 239 4 600 337 4 761 160 Net unrealized losses (–)/gains(+) on securities: Net unrealized holding losses/gains during the year, net of tax of EUR 6 million in 2005 (EUR – 2 million in 2004 and EUR – 11 million in 2003) Transfer to profi t and loss account on impairment Less: Reclassifi cation adjustment on disposal, net of tax of EUR 0 million in 2005 (EUR 10 million in 2004 and EUR 14 million in 2003) Other comprehensive income (+)/loss (–) – 81 9 – 3 67 Comprehensive income under US GAAP 3 649 1 See Note 1 and 2 2 11 71 27 – 95 – 172 3 171 – 27 – 203 3 894 54 Nokia in 2005 US GAAP Pension expense and additional minimum liability Under IFRS, pension assets, defi ned benefi t pension liabilities and pension expense are actuarially deter- mined in a similar manner to US GAAP. However, under IFRS the prior service cost, transition adjustments and pension expense resulting from plan amendments are generally recognized immediately. Under US GAAP, these expenses are generally recognized over a longer period. Also, under US GAAP the employer should recognize an additional minimum pension liability charged to other comprehensive income when the accumulated benefi t obligation (ABO) exceeds the fair value of the plan assets and this amount is not cov- ered by the liability recognized in the balance sheet. The calculation of the ABO is based on approach two as described in EITF 88 – 1, Determination of Vested Benefi t Obligation for a Defi ned Benefi t Pension Plan, under which the actuarial present value is based on the date of separation from service. The US GAAP pension expense adjustments refl ect the difference between the prepaid pension asset and related pension expense as determined by applying IAS 19, Employee Benefi ts, and the pension asset and related pension expense determined by applying FAS 87, Employers’ Accounting for Pensions. Development costs Development costs are capitalized under IFRS after the product involved has reached a certain degree of technical feasibility. Capitalization ceases and depre- ciation begins when the product becomes available to customers. The depreciation period of these capital- ized assets is between two and fi ve years. Under US GAAP, software development costs are similarly capitalized after the product has reached a certain degree of technological feasibility. However, certain non-software related development costs capitalized under IFRS are not capitalizable under US GAAP and therefore are expensed. Under IFRS, whenever there is an indication that capitalized development costs may be impaired the recoverable amount of the asset is estimated. An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. Recoverable amount is defi ned as the higher of an asset’s net selling price and value in use. Value in use is the present value of estimated discounted future cash fl ows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Under US GAAP, the unamortized capitalized costs of a software product are compared at each balance sheet date to the net realizable value of that product with any excess written off. Net realizable value is defi ned as the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the enterprise’s responsi- bility set forth at the time of sale. The amount of unamortized capitalized software development costs under US GAAP is EUR 213 million in 2005 (EUR 210 million in 2004). The US GAAP development cost adjustment refl ects the reversal of capitalized non-software related development costs under US GAAP net of the reversal of associated amortization expense and impairments under IFRS. The adjustment also refl ects differences in impairment methodologies under IFRS and US GAAP for the determination of the recoverable amount and net realizable value of software related development costs. Marketable securities and unlisted investments Under IFRS, all available-for-sale investments, which includes all publicly listed and non-listed marketable securities, are measured at fair value and gains and losses are recognized within shareholders’ equity until realized in the profi t and loss account upon sale or disposal. Under US GAAP, the Group’s listed marketable securities are classifi ed as available-for-sale and carried at aggregate fair value with gross unrealized holding gains and losses reported as a component of other comprehensive income (+)/loss (–). Investments in equity securities that are not traded on a public market are carried at historical cost, giving rise to an adjustment between IFRS and US GAAP. Social security cost on share-based payments Under IFRS, the Group recognizes a provision for social security costs on unvested equity instruments based upon local statutory law, net of deferred compen- sation, which is recorded as a component of total equity. The provision is considered as a cash-settled share-based payment and is measured by reference to the fair value of the equity benefi ts provided and the amount of the provision is adjusted to refl ect the changes in Nokia’s share price. Under US GAAP, a liability for social security costs on unvested equity instruments is recognized on the date of the event triggering the measurement and payment of the tax to the taxing authority. Accord- ingly, no expense is recorded until stock options are exercised or unvested shares are fully vested. The US GAAP social security costs adjustment refl ects the reversal of social security costs recorded under IFRS for outstanding options and unvested performance and restricted shares. Share-based compensation The Group maintains several share-based employee compensation plans, which are described more fully in Note 24. As of January 1, 2005 the Group adopted IFRS 2. Prior to the adoption of IFRS 2, the Group did not recognize the fi nancial effect of share-based payments until such payments were settled. In ac- cordance with the transitional provisions of IFRS 2, the Standard has been applied retrospectively to all grants of shares, share options or other equity instru- ments that were granted after November 7, 2002 and that were not yet vested at the effective date of the standard. Through December 31, 2004, the Group accounted for its employee share-based compensation programs under US GAAP using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations to measure em- ployee stock compensation. Under APB 25, compensa- tion expense was recognized under the Group’s option programs when options were awarded at an exercise price below the market price of the Group’s shares on the grant date and under the Group’s performance and restricted share programs as they were accounted for as variable award plans. Under APB 25, compensa- tion arising from stock option programs, restricted shares and performance shares was recorded as US GAAP 55 US GAAP deferred compensation within shareholders’ equity and recognized in the profi t and loss account over the vesting period of the underlying equity instruments. Effective January 1, 2005, the Group adopted Statement of Financial Accounting Standards No. 123 (R), Share-based Payment (“FAS 123R”) using the modifi ed prospective method. Under the modifi ed prospective method, all new equity-based compen- sation awards granted to employees and existing awards modifi ed on or after January 1, 2005, are measured based on the fair value of the award and are recognized in the statement of income over the required service period. Prior periods have not been revised. The retrospective transition provision of IFRS 2 and the modifi ed prospective transition provision of FAS 123(R) give rise to differences in the historical income statement for share-based compensation. Further, associated differences surrounding the effec- tive date of application of the standards to unvested shares give rise to both current and historical income statement differences in share-based compensation. Share issue premium refl ects the cumulative differ- ence between the amount of share-based compensa- tion recorded under US GAAP and IFRS and the amount of deferred compensation previously recorded in accordance with APB 25. Total share-based compensation expense under US GAAP was EUR 134 million in 2005. Total share- based compensation expense in 2005 would have been EUR 110 million under APB 25. The increase in share-based compensation expense resulting from the adoption of FAS 123R reduced basic and diluted earnings per share under US GAAP by 0.01 EUR in 2005. Cash fl ow hedges Under IFRS, the Group adopted IAS 39(R) as of Janu- ary 1, 2005, which supersedes IAS 39 (revised 2000). The changes, which are retrospective, under IAS 39(R) are that hedge accounting is no longer allowed under Treasury Center foreign exchange netting. Under US GAAP, the Group applies FAS 133, Ac- counting for Derivative Instruments and Hedging Activities. The US GAAP difference arises when a subsidiary’s reporting currency is different from Treasury Center’s 56 Nokia in 2005 reporting currency and external and internal hedge maturities are different more than 31 days. For those hedges not qualifying under US GAAP, the unrealized spot foreign exchange gains and losses from those hedges are released to the income statement. The US GAAP adjustment for prior years has been adjusted for the adoption for IAS 39(R). ation becomes fi xed. The average share price for a reasonable period before and after the measurement date is then used to value the shares. The US GAAP acquisition purchase price adjust- ment refl ects the different measurement dates used under IFRS and US GAAP in the valuation of shares issued in connection with a business combination. Sale and leaseback transaction In 2005, the Group entered into a sale and leaseback transaction. Under the agreement, the Group has a potential liability related to a pending zoning change scheduled to be fi nal in 2006. Under IFRS, the transac- tion qualifi ed as a sale and leaseback as the potential liability related to the zoning change is considered to be remote. Accordingly, the Group recorded a gain on the sale of the property and rental expense associated with the subsequent leaseback. Under US GAAP, the transaction did not qualify for sale and leaseback accounting as the clause is deemed to create continuing involvement by the Group. Ac- cordingly, the transaction is accounted for as a capital lease until the potential obligation lapses with the zoning change expected in 2006. Once the potential obligation lapses and continuing involvement ceases, the transaction can be accounted for as a sale and the corresponding gain can be realized. Until that time, the amount of the asset will remain on the US GAAP balance sheet and rental payments are recorded as a reduction of the principal amount of the obligation and as interest expense. The US GAAP sale and leaseback adjustment refl ects the reversal of the gain on sale of the property and rental expense recorded under IFRS net of interest expense recorded under US GAAP. Acquisition purchase price Under IFRS, when the consideration paid in a business combination includes shares of the acquirer, the purchase price of the acquired business is determined on the date at which the shares are exchanged. Under US GAAP, the measurement date for shares of the acquirer is the date the acquisition is announced or, if the number of shares is uncertain on such date, the fi rst day on which both the number of acquirer shares and the amount of other consider- Amortization and impairment of identifi able intangible assets acquired Under IFRS, prior to April 1, 2004, unpatented technol- ogy acquired was not separately recognized upon acquisition as an identifi able intangible asset but was included within goodwill. Under US GAAP, any unpatented technology acquired in a business combination is recorded as an identifi able intangible asset with an associated deferred tax liability. The intangible asset is amortized over its estimated useful life. The adjustment to US GAAP net income and shareholders’ equity relates to the amortization and accumulated amortization, respectively, recorded under IFRS related to Amber Networks’ intangible asset. During 2004 the carrying value of Amber Network unpatented technology was impaired since Nokia no longer developed nor used the technology acquired and its carrying amount was deemed not recoverable through estimated future cash fl ows. The total impact on net income in 2004 amounted to EUR 58 million of which the impairment recognized under US GAAP was EUR 47 million. The net carrying amount of other intangible as- sets under US GAAP is EUR 425 million in 2005 (EUR 419 million in 2004) and consists of capitalized develop- ment costs of EUR 213 million (EUR 210 million) and acquired patents, trademarks and licenses of EUR 212 million (EUR 209 million). The Group does not have any indefi nite lived intangible assets. Amortization expense under US GAAP of other intangible assets as of December 31, 2005, is expected to be as follows: US GAAP corded under IFRS that did not qualify as impairments under US GAAP. Upon completion of the 2003 annual impairment test, the Group determined that the impairment re- corded for Amber Networks should be reversed under US GAAP as the fair value of the reporting unit in which Amber Networks resides exceeded the book value of the reporting unit. The annual impairment tests performed subsequent to 2003 continue to support the reversal of this impairment. The Group recorded no goodwill impairments during 2005 and 2004. Below is a roll forward of US GAAP goodwill during 2005 and 2004: 2006 2007 2008 2009 2010 Thereafter EURm 164 79 27 13 6 136 425 Amortization of goodwill Under IFRS, the Group adopted the provisions of IFRS 3 on January 1, 2005. As a result, goodwill recognized relating to purchase acquisitions and acquisitions of associated companies is no longer subject to amorti- zation. Under the transitional provisions of IFRS 3, this change in accounting policy was effective immedi- ately for acquisitions made after March 31, 2004. Under US GAAP, the Group records goodwill in ac- cordance with FAS 142, Goodwill and Other Intangible Assets, (FAS 142). The Group adopted the provisions of FAS 142 on January 1, 2002 and as a result, goodwill relating to purchase acquisitions and acquisitions of associated companies is no longer subject to amorti- zation subsequent to the date of adoption. The US GAAP adjustment reverses amortization expense and the associated movement in accumu- lated amortization recorded under IFRS prior to the adoption of IFRS 3. Impairment of goodwill Under IFRS, goodwill is allocated to “cash-generating units”, which are the smallest group of identifi able assets that include the goodwill under review for im- pairment and generate cash infl ows from continuing use that are largely independent of the cash infl ows from other assets. Under IFRS, the Group recorded an impairment of goodwill of EUR 151 million related to Amber Networks in 2003 as the carrying amount of the cash-generating unit exceeded the recoverable amount of the unit. Under US GAAP, goodwill is allocated to “reporting units”, which are operating segments or one level below an operating segment (as defi ned in FAS 131, Disclosures about Segments of an Enterprise and Related Information). The goodwill impairment test under FAS 142 compares the carrying value for each reporting unit to its fair value based on discounted cash fl ows. The US GAAP impairment of goodwill adjustment refl ects the cumulative reversal of impairments re- EURm Balance as of January 1, 2004 Translation adjustment Balance as of December 31, 2004 Goodwill disposed Translation adjustment Balance as of December 31, 2005 Mobile Phones Multimedia Enterprise Solutions Networks Common Group Functions 129 – 1 128 – 45 173 22 – 22 – – 22 40 – 3 37 – 4 41 271 – 22 249 – 28 277 9 – 9 – 9 – – Group 471 – 26 445 – 9 77 513 US GAAP 57 US GAAP Loss on disposal In 2005, the Group divested the remaining holdings in a Group company resulting in a loss on disposal. Under IFRS, the goodwill related to the original acquisition had been fully amortized. Under US GAAP, the goodwill related to the ac- quisition of the Group company was written off upon disposal resulting in an additional loss. The US GAAP loss on disposal adjustment refl ects the write-off of goodwill under US GAAP that was fully amortized under IFRS. Translation of goodwill Under IFRS, the Group has historically translated good- will arising on the acquisition of foreign subsidiaries at historical rates. Subsequent to the adoption of IAS 21 (revised 2004) as of January 1, 2005, the Group translates goodwill arising on prospective acquisi- tions of foreign companies at balance sheet date closing rates. Under US GAAP, goodwill is translated at the closing rate on the balance sheet date with gains and losses recorded as a component of other comprehen- sive income. The US GAAP translation of goodwill adjustment refl ects cumulative translation differences between historical and current rates on goodwill arising from acquisitions of foreign subsidiaries. 58 Nokia in 2005 Critical accounting policies Our accounting policies affecting our fi nancial condi- tion and results of operations are more fully described in Note 1 to our consolidated fi nancial statements. Cer- tain of Nokia’s accounting policies require the applica- tion of judgment by management in selecting appro- priate assumptions for calculating fi nancial estimates, which inherently contain some degree of uncertainty. Management bases its estimates on historical experi- ence and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Nokia believes the following are the critical accounting policies and related judgments and estimates used in the preparation of its consolidated fi nancial statements. We have discussed the applica- tion of these critical accounting estimates with our Board of Directors and Audit Committee. Revenue recognition Revenue from the majority of the Group is recognized when persuasive evidence of an arrangement exists, de- livery has occurred, the fee is fi xed or determinable and collectibility is probable. The remainder of revenue is recorded under the percentage of completion method. Mobile Phones, Multimedia and Enterprise Solu- tions, and certain Networks’ revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fi xed or determinable and collectibility is probable. This requires us to assess at the point of delivery whether these criteria have been met. When management determines that such criteria have been met, revenue is recognized. Nokia records estimated reductions to revenue for special pricing agreements, price protection and other vol- ume based discounts at the time of sale, mainly in the mobile device business. Sales adjustments for volume based discount programs are estimated based largely on historical activity under similar programs. Price protection adjustments are based on estimates of future price reductions and certain agreed customer inventories at the date of the price adjustment. An immaterial part of the revenue from products sold through distribution channels is recognized when the reseller or distributor sells the product to the end user. Networks’ revenue and cost of sales from contracts involving solutions achieved through modi- fi cation of complex telecommunications equipment is recognized on the percentage of completion basis when the outcome of the contract can be estimated reliably. This occurs when total contract revenue and the cost to complete the contract can be estimated reliably, it is probable that economic benefi ts associ- ated with the contract will fl ow to the Group, and the stage of contract completion can be measured. When we are not able to meet those conditions, the policy is to recognize revenues only equal to costs incurred to date, to the extent that such costs are expected to be recovered. Completion is measured by reference to costs incurred to date as a percentage of estimated total project costs, the cost-to-cost method. The percentage of completion method relies on estimates of total expected contract revenue and costs, as well as the dependable measurement of the progress made towards completing the particular project. Recognized revenues and profi t are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. The cumulative impact of a revision in estimates is recorded in the period such revisions become likely and estimable. Losses on projects in progress are recognized in the period they become likely and estimable. Networks’ customer contracts may include the provision of separately identifi able components of a single transaction, for example the construction of a network solution and subsequent network mainte- nance services. Accordingly, for these arrangements, revenue recognition requires proper identifi cation of the components of the transaction and evaluation of their commercial effect in order to refl ect the substance of the transaction. If the components are considered separable, revenue is allocated across the identifi able components based upon relative fair values. Networks’ current sales and profi t estimates for projects may 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. Customer fi nancing We have provided a limited amount of customer fi nancing and agreed extended payment terms with selected customers in our Networks business. In establishing credit arrangements, management must assess the creditworthiness of the customer and the timing of cash fl ows expected to be received under the arrangement. However, should the actual fi nancial position of our customers or general economic conditions differ from our assumptions, we may be required to re-assess the ultimate collectibility of such fi nancings and trade credits, which could result in a write-off of these balances in future periods and thus negatively impact our profi ts in future periods. Our assessment of the net recoverable value considers the collateral and security arrangements of the receivable as well as the likelihood and timing of estimated collections. See also Note 38(b) to our consolidated fi nancial statements for a further discussion of long- term loans to customers and other parties. Allowances for doubtful accounts We maintain allowances for doubtful accounts for estimated losses resulting from the subsequent in- ability of our customers to make required payments. If the fi nancial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required in future periods. Management specifi cally analyzes accounts receivables and analyzes historical bad debt, customer concentrations, customer cred- itworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Inventory-related allowances We periodically review our inventory for excess, obso- lescence and declines in market value below cost and record an allowance against the inventory balance for any such declines. These reviews require management to estimate future demand for our products. Possible changes in these estimates could result in revisions to the valuation of inventory in future periods. Warranty provisions We provide for the estimated cost of product war- ranties at the time revenue is recognized. Nokia’s Critical accounting policies 59 Critical accounting policies products are covered by product warranty plans of varying periods, depending on local practices and regulations. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our compo- nent suppliers, our warranty obligations are affected by actual product failure rates (fi eld failure rates) and by material usage and service delivery costs incurred in correcting a product failure. Our warranty provi- sion is established based upon our best estimates of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. As we continuously introduce new products, which incorporate complex technology, and as local laws, regulations and practices may change, it will be increasingly diffi cult to anticipate our failure rates, the length of warranty periods and repair costs. While we believe that our warranty provisions are adequate and that the judgments applied are appropriate, the ulti- mate cost of product warranty could differ materially from our estimates. When the actual cost of quality of our products is lower than we originally anticipated, we release an appropriate proportion of the provision, and if the cost of quality is higher than anticipated, we increase the provision. Provision for intellectual property rights, or IPR, infringements We provide for the estimated future settlements related to asserted and unasserted IPR infringements based on the probable outcome of each infringement. Our products and solutions include increasingly complex technologies involving numerous patented and other proprietary technologies. Although we proactively try to ensure that we are aware of any patents and other intellectual property rights related to our products and solutions under development and thereby avoid inadvertent infringement of proprietary technologies, the nature of our business is such that patent and other intellectual property right infringe- ments may and do occur. Through contact with parties claiming infringement of their patented or otherwise exclusive technology, or through our own monitoring of developments in patent and other intel- lectual property right cases involving our competitors, we identify potential IPR infringements. infringements made known to us through assertion by third parties, or through our own monitoring of patent- and other IPR-related cases in the relevant legal systems. To the extent that we determine that an identifi ed potential infringement will result in a prob- able outfl ow of resources, we record a liability based on our best estimate of the expenditure required to settle infringement proceedings. Our experience with claims of IPR infringement is that there is typically a discussion period with the accusing party, which can last from several months to years. In cases where a settlement is not reached, the discovery and ensuing legal process typically lasts a minimum of one year. For this reason, IPR infringe- ment claims can last for varying periods of time, resulting in irregular movements in the IPR infringe- ment provision. In addition, the ultimate outcome or actual cost of settling an individual infringement may materially vary from our estimates. Legal contingencies As discussed in Note 32 to the consolidated fi nancial statements, legal proceedings covering a wide range of matters are pending or threatened in various jurisdic- tions against the Group. We record provisions for pend- ing litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates. Capitalized development costs We capitalize certain development costs when it is probable that a development project will be a success and certain criteria, including commercial and techni- cal feasibility, have been met. These costs are then amortized on a systematic basis over their expected useful lives, which due to the constant development of new technologies is between two to fi ve years. During the development stage, management must estimate the commercial and technical feasibility of these projects as well as their expected useful lives. Should a product fail to substantiate its estimated feasibility or life cycle, we may be required to write off excess development costs in future periods. Whenever there is an indicator that develop- impaired, the recoverable amount of the asset is estimated. An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is defi ned as the higher of an asset’s net selling price and value in use. Value in use is the present value of discounted estimated future cash fl ows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. For projects still in development, these estimates include the future cash outfl ows that are expected to occur before the asset is ready for use. See Note 9 to our consolidated fi nancial statements. Impairment reviews are based upon our projec- tions of anticipated future cash fl ows. The most signifi - cant variables in determining cash fl ows are discount rates, terminal values, the number of years on which to base the cash fl ow projections, as well as the assump- tions and estimates used to determine the cash infl ows and outfl ows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry com- parisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash fl ows over that period. While we believe that our assumptions are appropriate, such amounts estimated could differ materially from what will actually occur in the future. For IFRS, discounted estimated cash fl ows are used to identify the existence of an impairment while for US GAAP undiscounted future cash fl ows are used. Consequently, an impairment could be required under IFRS but not under US GAAP. Valuation of long-lived and intangible assets and goodwill We assess the carrying value of identifi able intangible assets, long-lived assets and goodwill annually, or more frequently if events or changes in circumstances indicate that such carrying value may not be recover- able. Factors we consider important, which could trigger an impairment review, include the following: » » signifi cant underperformance relative to historical or projected future results; signifi cant changes in the manner of our use of the acquired assets or the strategy for our overall business; and We estimate the outcome of all potential IPR ment costs capitalized for a specifi c project may be » signifi cantly negative industry or economic trends. 60 Nokia in 2005 Critical accounting policies When we determine that the carrying value of intan- gible assets, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on discounted projected cash fl ows. This review is based upon our projections of anticipated future cash fl ows. The most signifi cant variables in determining cash fl ows are discount rates, terminal values, the number of years on which to base the cash fl ow projections, as well as the assumptions and estimates used to determine the cash infl ows and outfl ows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of prod- ucts and forecasted life cycle and forecasted cash fl ows over that period. While we believe that our assump- tions are appropriate, such amounts estimated could differ materially from what will actually occur in the future. In assessing goodwill, for IFRS these discounted cash fl ows are prepared at a cash generating unit level, and for US GAAP these cash fl ows are prepared at a re- porting unit level. Consequently, an impairment could be required under IFRS and not US GAAP or vice versa. Amounts estimated could differ materially from what will actually occur in the future. Fair value of derivatives and other fi nancial instruments Our investments consist primarily of derivative fi nan- cial instruments associated with underlying hedged positions and equity investments. The fair value of fi nancial instruments that are not traded in an active market (for example, unlisted equities, currency options and embedded derivatives) are determined using valuation techniques. We use judgment to select an appropriate valuation methodology and underly- ing assumptions based principally on existing market conditions. While we believe our valuation estimates are appropriate, changes in the performance of equity and derivative markets may cause the Group to recog- nize material impairments or losses in future periods. Deferred taxes Management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and the extent to which deferred tax assets can be recognized. We recognize deferred tax assets if it is probable that suffi cient taxable income will be available in the future against which the temporary differences and unused tax losses can be utilized. We have considered future taxable income and tax planning strategies in assessing whether deferred tax assets should be recognized. If the fi nal 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 benefi t obligation and expense for defi ned benefi t pension plans is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 6 to our consoli- dated fi nancial 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 diffi cult 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, signifi - cant differences in our actual experience or signifi cant 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, exclud- ing 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 de- scribed in Note 24 to the consolidated fi nancial state- ments and include, among others, the dividend yield, expected volatility and expected life of the options. The expected life of 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 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 diffi cult. 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 employ- ees 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 profi t and loss account, and in subsequent periods for unvested performance shares for which the expense has not yet been recognized in the profi t and loss account. Signifi cant 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. Critical accounting policies 61 The current members of our Group Executive Board are set forth below. Chairman Jorma Ollila, b. 1950 Chairman and CEO of Nokia Corporation. Group Executive Board member since 1986. Group Executive Board Chairman since 1992. Joined Nokia 1985. Master of Political Science (University of Helsinki), Master of Science (Econ.) (London School of Econom- ics), Master of Science (Eng.) (Helsinki University of Technology). President and CEO, and Chairman of the Group Execu- tive Board of Nokia Corporation 1992 – 1999, President of Nokia Mobile Phones 1990 – 1992, Senior Vice President, Finance of Nokia 1986 – 1989. Holder of vari- ous managerial positions at Citibank within corporate banking 1978 – 1985. Member of the Board of Directors of Ford Motor Com- pany, Vice Chairman of the Board of Directors of UPM- Kymmene Corporation and Vice Chairman of the Board of Directors of Otava Books and Magazines Group Ltd. Chairman of the Board of Directors of Royal Dutch Shell Plc from June 1, 2006. Chairman of the Boards of Directors and the Supervisory Boards of Finnish Business and Policy Forum EVA and The Research Institute of the Finnish Economy ETLA. Chairman of The European Round Table of Industrialists. Simon Beresford-Wylie, b. 1958 Executive Vice President and General Manager of Networks. Group Executive Board member since Feb. 1, 2005. Joined Nokia 1998. Bachelor of Arts (Economic Geography and History) (Australian National University). Senior Vice President of Nokia Networks, Asia Pacifi c 2003 – 2004, Senior Vice President, Customer Opera- tions of Nokia Networks, 2002 – 2003, Vice President, Customer Operations of Nokia Networks 2000 – 2002, Managing Director of Nokia Networks in India and Area General Manager, South Asia 1999 – 2000, Regional Director of Business Development, Project and Trade Finance of Nokia Networks, Asia Pacifi c 1998 – 1999, Chief Executive Offi cer of Modi Testra, India 1995 – 1998, General Manager, Banking and Finance, Corporate and Government business unit of Telstra Corporation 1993 – 1995, holder of executive positions in the Corporate and Government business units of Telstra Corporation 1989 – 1993, holder of executive, managerial and clerical positions in the Australian Commonwealth Public Service 1982 – 1989. Member of the Board of Directors of The Vitec Group plc. Robert Andersson, b. 1960 Executive Vice President of Customer and Market Operations. Group Executive Board member since Oct. 1, 2005. Joined Nokia in 1985. Olli-Pekka Kallasvuo, b. 1953 President and COO. President and CEO as from June 1, 2006. Group Executive Board member since 1990. With Nokia 1980 – 81, rejoined 1982 Master of Business Administration (George Washing- ton University), Master of Science (Econ.) (Swedish School of Economics and Business Administration in Helsinki). Senior Vice President for Customer and Market Opera- tions, Europe, Middle East and Africa 2004 – 2005, Senior Vice President of Nokia Mobile Phones in Asia- Pacifi c 2001 – 2004, Vice President of Sales for Nokia Mobile Phones in Europe and Africa 1998 – 2001. LL.M. (University of Helsinki). Executive Vice President and General Manager of Mobile Phones 2004 – 2005, Executive Vice President, CFO of Nokia 1999 – 2003, Executive Vice President of Nokia Americas and President of Nokia Inc. 1997 – 1998, Executive Vice President, CFO of Nokia 1992 – 1996, Senior Vice President, Finance of Nokia 1990 – 1991. Chairman of the Board of Directors of Sampo plc (until March 2006) and member of the Board of Directors of EMC Corporation. Group Executive Board January 1, 2006 According to our articles of association, we have a Group Executive Board, which is responsible for the operative management of the Group. The Chairman and members of the Group Executive Board are appointed by the Board of Directors. Only the Chairman of the Group Executive Board can be a member of both the Board of Directors and the Group Executive Board. The Board of Directors has released Jorma Ollila, Chairman and CEO, upon his request from his duties as the CEO and Chairman of the Group Executive Board effective June 1, 2006. The Board of Directors has appointed Olli-Pekka Kallasvuo President and COO with effect from October 1, 2005 until May 31, 2006. From June 1, 2006, Mr. Kallasvuo will become President and CEO and Chairman of the Group Executive Board. During 2005, we announced the following changes in the members of the Group Executive Board: » » » » » » » » Tero Ojanperä was appointed Chief Strategy Offi cer and member of the Group Executive Board effective January 1, 2005. Sari Baldauf, formerly Executive Vice President and General Manager of Networks, resigned effective January 31, 2005. J.T. Bergqvist, formerly Senior Vice President and General Manager of Business Units of Networks, resigned effective January 31, 2005. Simon Beresford-Wylie was appointed Ex- ecutive Vice President and General Manager of Networks and member of the Group Executive Board effective February 1, 2005. Pekka Ala-Pietilä, formerly President of Nokia and Head of Customer and Market Operations resigned from the Group Executive Board effective October 1, 2005. Thereafter, Mr. Ala-Pietilä served as an Executive Advisor for Nokia until January 31, 2006. Yrjö Neuvo, formerly Senior Vice President and Technology Advisor, resigned from the Group Executive Board effective October 1, 2005. Robert Andersson was appointed Executive Vice President of Customer and Market Operations and member of the Group Execu- tive Board effective October 1, 2005. Kai Öistämö was appointed Executive Vice President and General Manager of Mobile Phones and member of the Group Executive Board effective October 1, 2005. 62 Nokia in 2005 Pertti Korhonen, b. 1961 Executive Vice President, Chief Technology Offi cer. Group Executive Board member since 2002. Joined Nokia 1986. Dr. Tero Ojanperä, b. 1966 Executive Vice President, Chief Strategy Offi cer. Group Executive Board member since Jan. 1, 2005. Joined Nokia 1990. Master of Science (Electronics Eng.) (University of Oulu). Executive Vice President of Nokia Mobile Software 2001 – 2003, Senior Vice President, Global Opera- tions, Logistics and Sourcing of Nokia Mobile Phones 1999 – 2001, Senior Vice President, Global Operations and Logistics of Nokia Mobile Phones 1998 – 1999, Vice President, Logistics of Nokia Mobile Phones 1996 – 1998, Vice President, Manufacturing Europe of Nokia Mobile Phones 1993 – 1996, Project Executive of Nokia Mobile Phones UK Ltd 1991 – 1993, Vice Presi- dent, R&D of Nokia Mobile Phones, Oulu 1990 – 1991. Mary T. McDowell, b. 1964 Executive Vice President and General Manager of Enterprise Solutions. Group Executive Board member since 2004. Joined Nokia 2004. Bachelor of Science (Computer Science) (College of Engineering at the University of Illinois). Senior Vice President, Strategy and Corporate Devel- opment of Hewlett-Packard Company 2003, Senior Vice President & General Manager, Industry-Standard Serv- ers of Hewlett-Packard Company 2002 – 2003, Senior Vice President & General Manager, Industry-Standard Servers of Compaq Computer Corporation 1998 – 2002, Vice President, Marketing, Server Products Division of Compaq Computer Corporation 1996 – 1998. Holder of executive, managerial and other positions at Compaq Computer Corporation 1986 – 1996. Member of the Board of Visitors for the College of Engineering at the University of Illinois. Hallstein Moerk, b. 1953 Executive Vice President, Human Resources. Group Executive Board member since 2004. Joined Nokia 1999. Diplomøkonom (Econ.) (Norwegian School of Manage- ment). Holder of various positions at Hewlett-Packard Corporation 1977 – 1999. Member of the Board of Advisors for Center for HR Strategy, Rutgers University. Master of Science (University of Oulu), Ph.D. (Delft University of Technology, The Netherlands). Senior Vice President, Head of Nokia Research Center 2002 – 2004. Vice President, Research, Standardiza- tion and Technology of IP Mobility Networks, Nokia Networks 1999 – 2001. Vice President, Radio Access Systems Research and General Manager of Nokia Networks in Korea, 1999. Head of Radio Access Systems Research, Nokia Networks 1998 – 1999, Principal Engi- neer, Nokia Research Center, 1997 – 1998. Chairman of Nokia Foundation. Vice Chairman of the Center for Wireless Communications, Oulu University. Member of the Board of Technomedicum Research Institute. Member of IST Advisory Group (ISTAG) for the European Commission. Member of the Board of the Foundation of Finnish Institute in Japan. Member of the Industrial Advisory Council of Center for TeleIn- Frastruktur (CTIF), Aalborg University. Member of the Institute of Electrical and Electronics Engineers, Inc. (IEEE). Richard A. Simonson, b. 1958 Executive Vice President, Chief Financial Offi cer. Group Executive Board member since 2004. Joined Nokia 2001. Bachelor of Science (Mining Eng.) (Colorado School of Mines), Master of Business Administration (Finance) (Wharton School of Business at University of Pennsyl- vania). Vice President & Head of Customer Finance of Nokia Corporation 2001 – 2003, Managing Director of Telecom & Media Group of Barclays 2001, Head of Global Project Finance and other various positions at Bank of America Securities 1985 – 2001. Member of the Board of Trustees of International House – New York. Veli Sundbäck, b. 1946 Executive Vice President, Corporate Relations and Responsibility of Nokia Corporation. Group Executive Board member since 1996. Joined Nokia 1996. LL.M. (University of Helsinki). Executive Vice President, Corporate Relations and Trade Policy of Nokia Corporation 1996-. Secretary of State at the Ministry for Foreign Affairs 1993 – 1995, Under-Sec- retary of State for External Economic Relations at the Ministry for Foreign Affairs 1990 – 1993. Member of the Board of Directors of Finnair Oyj. Member of the Board and its executive committee, Confederation of Finnish Industries (EK), Vice Chairman of the Board, Technology Industries of Finland, Vice Chairman of the Board of the International Chamber of Commerce, Finnish Section, Chairman of the Board of the Finland-China Trade Association. Anssi Vanjoki, b. 1956 Executive Vice President and General Manager of Multimedia. Group Executive Board member since 1998. Joined Nokia 1991. Master of Science (Econ.) (Helsinki School of Economics and Business Administration). Executive Vice President of Nokia Mobile Phones 1998 – 2003, Senior Vice President, Europe and Africa of Nokia Mobile Phones 1994 – 1998, Vice President, Sales of Nokia Mobile Phones 1991 – 1994, 3M Corporation 1980 – 1991. Member of the Board of Directors of Amer Group Plc. Dr. Kai Öistämö, b. 1964 Executive Vice President and General Manager of Mobile Phones. Group Executive Board Member since Oct. 1, 2005. Joined Nokia in 1991. Doctor of Technology (Signal Processing), Master of Sci- ence (Engineering) (Tampere University of Technology). Senior Vice President, Business Line Management of Mobile Phones 2004 – 2005, Senior Vice President, Mobile Phones Business Unit of Nokia Mobile Phones 2002 – 2003, Vice President, TDMA/GSM 1900 Product Line of Nokia Mobile Phones 1999 – 2002, Vice President, TDMA Product Line 1997 – 1999, various technical and managerial positions in Nokia Consumer Electronics and Nokia Mobile Phones 1991 – 1997. Changes in the Nokia Group Executive Board On February 15, 2006 the Group announced that Pertti Korhonen, Chief Technology Offi cer and Executive Vice President, Technology Platforms, and a member of the Group Executive Board will resign from the Group Executive Board as of April 1, 2006. He will also resign from Nokia. Niklas Savander has been appointed as Executive Vice President, Technology Platforms and a member of the Group Executive Board as of April 1, 2006. Group Executive Board 63 Board of Directors January 1, 2006 Pursuant to the provisions of the Finnish Companies Act and our articles of association, the control and management of Nokia is divided among the shareholders at a general meeting, the Board of Directors and the Group Executive Board. The current members of the Board of Directors were elected at the Annual General Meeting on April 7, 2005, in accordance with the proposal of the Corporate Governance and Nomination Committee of the Board of Directors. On the same date, the Chairman and Vice Chairman were elected by the members of the Board of Directors. On August 1, 2005, we announced that the Board of Directors has released Jorma Ollila, Chairman and CEO, upon his request, from his duties as CEO effective June 1, 2006. The Corporate Governance and Nomination Committee of the Board of Directors will propose to the Annual General Meeting convening on March 30, 2006 that Jorma Ollila continues after June 1, 2006 as Non-Executive Chairman. The Committee has received Mr. Ollila’s confi rmation that he is available for this position. Certain information with respect to the members of the Board of Directors is set forth below. Georg Ehrnrooth, b. 1940 Board member since 2000. Master of Science (Eng.) (Helsinki University of Tech- nology). President and CEO of Metra Corporation 1991 – 2000, President and CEO of Lohja Corporation 1979 – 1991. Holder of various executive positions at Wärtsilä- Corporation within production and management 1965 – 1979. Chairman of the Board of Directors of Assa Abloy AB (publ) and Vice Chairman of the Board of Directors of Rautaruukki Corporation, member of the Board of Directors of Oy Karl Fazer Ab, Sandvik AB (publ) and Sampo plc. Vice Chairman of the Boards of Directors of The Research Institute of the Finnish Economy ETLA and Finnish Business and Policy Forum EVA. Daniel R. Hesse, b. 1953 CEO of Sprint Communication, Local Telecommunications Division. Board member since 2005. A.B. (University of Notre Dame), M.B.A. (Cornell Univer- sity), M.S. (Massachusetts Institute of Technology). Chairman, President and CEO of Terabeam 2000 – 2004, President and CEO of AT&T Wireless Services 1997 – 2000, Executive Vice President of AT&T 1997 – 2000, General Manager for the AT&T Online Serv- ices Group 1996, President and CEO of AT&T Network Systems International 1991 – 1995. Various manage- rial positions in AT&T, including network operations, strategic planning and sales 1977 – 1991. Member of the Board of Directors of VF Corporation. Member of the National Board of Governors of the Boys & Girls Clubs of America. Dr. Bengt Holmström, b. 1949 Paul A. Samuelson Professor of Economics at MIT, joint appointment at the MIT Sloan School of Man- agement. Board member since 1999. Bachelor of Science (Helsinki University), Master of Science (Stanford University), Doctor of Philosophy (Stanford University). Edwin J. Beinecke Professor of Management Studies at Yale University 1985 – 1994. Member of the Board of Directors of Kuusakoski Oy. Member of the American Academy of Arts and Sci- ences and Foreign Member of The Royal Swedish Academy of Sciences. Per Karlsson, b. 1955 Independent Corporate Advisor. Board member since 2002. Degree in Economics and Business Administration (Stockholm School of Economics). Executive Director, with mergers and acquisitions advisory responsibilities, at Enskilda M&A, Enskilda Securities (London) 1986 – 1992. Corporate strategy consultant at the Boston Consulting Group (London) 1979 – 1986. Board member of IKANO Holdings S.A. Edouard Michelin, b. 1963 Managing Partner and CEO of Michelin Group. Board member since 2005. Engineering graduate (Ecole Centrale de Paris) Head of Michelin Manufacturing Facilities and Michelin Truck Business in North America 1990 – 1993, various managerial positions at Michelin, including research, manufacturing, marketing and sales 1988 – 1990. Member of the World Business Council for Sustainable Development (WBCSD). Chairman Jorma Ollila, b. 1950 Chairman and CEO and Chairman of the Group Executive Board of Nokia Corporation. Board member since 1995. Chairman since 1999. Master of Political Science (University of Helsinki), Master of Science (Econ.) (London School of Econom- ics), Master of Science (Eng.) (Helsinki University of Technology). President and CEO, Chairman of the Group Executive Board of Nokia Corporation 1992 – 1999, President of Nokia Mobile Phones 1990 – 1992, Senior Vice Presi- dent, Finance of Nokia 1986 – 1989. Holder of various managerial positions at Citibank within corporate banking 1978 – 1985. Member of the Board of Directors of Ford Motor Com- pany, Vice Chairman of the Board of Directors of UPM- Kymmene Corporation, Vice Chairman of the Board of Directors of Otava Books and Magazines Group Ltd. Chairman of the Board of Directors of Royal Dutch Shell Plc from June 1, 2006. Chairman of the Boards of Directors and the Supervisory Boards of Finnish Business and Policy Forum EVA and The Research Institute of the Finnish Economy ETLA. Chairman of The European Round Table of Industrialists. Vice Chairman Paul J. Collins, b. 1936 Board member since 1998. Vice Chairman since 2000. BBA (University of Wisconsin), MBA (Harvard Business School). Vice Chairman of Citigroup Inc. 1998 – 2000, Vice Chair- man and member of the Board of Directors of Citicorp and Citibank N.A. 1988 – 2000. Holder of various execu- tive positions at Citibank within investment manage- ment, investment banking, corporate planning as well as fi nance and administration 1961 – 1988. Member of the Board of Directors of BG Group and The Enstar Group, Inc. Member of the Supervisory Board of Actis Capital LLP. 64 Nokia in 2005 Dame Marjorie Scardino, b. 1947 Chief Executive and member of the Board of Directors of Pearson plc. Board member since 2001. Proposal of the Corporate Governance and Nomination Committee of the Board On January 26, 2006, the Corporate Governance and Nomination Committee announced its proposal to the Annual General Meeting convening on March 30, 2006 regarding the election of the members of the Board of Directors. The Corporate Governance and Nomination Committee BA (Baylor), JD (University of San Francisco). will propose to the Annual General Meeting that the number of Board members remains at ten, and that the following current Board members: Paul J. Collins, Georg Ehrnrooth, Daniel R. Hesse, Bengt Holmström, Per Karlsson, Edouard Michelin, Jorma Ollila, Marjorie Scardino and Vesa Vainio, be re-elected for a term of one year. Arne Wessberg, member of the Nokia Board since 2001, will not stand for re-election to the Board of Directors. In addition, the Committee proposes that Keijo Suila be elected as a new member of the Board of Directors for the next one-year term. Keijo Suila, 60, acted as President and CEO of Finnair Oyj, the major Finnish aviation company, from 1999 until his retirement in 2005. Prior to this, Mr. Suila held various senior executive positions, including Vice Chairman and Executive Vice President, at Huhtamäki Oy, Leaf Group and Leaf Europe during 1985 – 1998. Chief Executive of The Economist Group 1993 – 1997, President of the North American Operations of The Economist Group 1985 – 1993, lawyer 1976 – 1985 and publisher of The Georgia Gazette newspaper 1978 – 1985. Vesa Vainio, b. 1942 Board member since 1993. LL.M. (University of Helsinki). Chairman 1998 – 1999 and 2000 – 2002 and Vice Chairman 1999 – 2000 of the Board of Directors of Nordea AB (publ). Chairman of the Executive Board and CEO of Merita Bank Ltd and CEO of Merita Ltd 1992 – 1997. President of Kymmene Corporation 1991 – 1992. Holder of various other executive posi- tions in Finnish industry 1972 – 1991. Chairman of the Board of Directors of UPM-Kymmene Corporation. Arne Wessberg, b. 1943 President of the European Broadcasting Union (EBU). Board member since 2001. Studies in economics in the University of Tampere 1963 – 1966. Chairman of the Board of Directors and Chief Executive Offi cer of Yleisradio Oy (Finnish Broad- casting Company) 1994 – 2005, Director of TV 1 and TV 2 1980 – 1994, reporter and editor 1971 – 1976 of Yleisradio Oy. Chairman of the Board of Eurosport Consortium 1998 – 2000, member 1989 – 1997. President of the International Institute of Communications, member of the Board of Directors of the International Acad- emy of Television Arts & Sciences and member of the Trilateral Commission (Europe). Member of the Board of Arcada Polytechnic. Group Executive Board 65 Risk factors March 2, 2006 Set forth below is a description of factors that may affect our business, results of operations and share price from time to time. » Our sales and profi tability depend on the con- tinued growth of the mobile communications industry as well as the growth and profi tability of the new market segments within that industry which we target. If the mobile communications industry does not grow as we expect, or if the new market segments which we target grow less or are less profi table than expected, or if new faster growing market segments emerge in which we have not invested, our sales and profi tability may be materially adversely affected. » » » We need to understand the different markets in which we operate, and meet the needs of our customers, which include mobile network operators, distributors, independent retailers, corporate customers and end-users. We need to have a competitive product portfolio and to work together with our operator customers to address their needs. Our failure to identify key market trends and to respond timely and successfully to the needs of our customers may have a material adverse impact on our market share, business and results of operations. » We must develop or otherwise acquire complex, evolving technologies to use in our business. If we fail to develop or otherwise acquire these complex technologies as required by the market, with full rights needed to use in our business, or to successfully commercialize such technolo- gies as new advanced products and solutions that meet customer demand, or fail to do so on a timely basis, this may have a material adverse effect on our business, our ability to meet our targets and our results of operations. » Our results of operations, particularly our profi t- ability, may be materially adversely affected if we do not successfully manage price erosion and are not able to manage costs related to our products and operations. 66 Nokia in 2005 Competition in our industry is intense. Our failure to maintain or improve our market position and respond successfully to changes in the com- petitive landscape may have a material adverse impact on our business and results of operations. » Our sales and results of operations could be ma- terially adversely affected if we fail to effi ciently manage our manufacturing and logistics without interruption, or fail to ensure that our products and solutions meet our and our customers’ qual- ity, safety, security and other requirements and are delivered on time. » We depend on a limited number of suppliers for the timely delivery of components and for their compliance with our supplier requirements, such as our and our customers’ product quality, safety, security and other standards. Their failure to do so could materially adversely affect our ability to deliver our products and solutions successfully and on time. » We are developing a number of our new products and solutions together with other companies. If any of these companies were to fail to perform, we may not be able to bring our products and so- lutions to market successfully or in a timely way and this could have a material adverse impact on our sales and profi tability. » Our operations rely on complex and highly centralized information technology systems and networks. If any system or network disruption oc- curs, this reliance could have a material adverse impact on our operations, sales and operating results. » » » Our products and solutions include increasingly complex technology involving numerous new Nokia patented and other proprietary technolo- gies, as well as some developed or licensed to us by certain third parties. As a consequence, evaluating the rights related to the technologies we use or intend to use is more and more chal- lenging, and we expect increasingly to face claims that we have infringed third parties’ intellectual property rights. The use of increasingly complex technology may also result in increased licensing costs for us, restrictions on our ability to use certain technologies in our products and solution offerings, and/or costly and time-consuming liti- gation. Third parties may also commence actions seeking to establish the invalidity of intellectual property rights on which we depend. The global networks business relies on a limited number of customers and large multi-year contracts. Unfavorable developments under such a contract or in relation to a major customer may adversely and materially affect our sales, our results of operations and cash fl ow. Our sales derived from, and assets located in, emerging market countries may be materially adversely affected by economic, regulatory and political developments in those countries or by other countries imposing regulations against imports to such countries. As sales from these countries represent a signifi cant portion of our total sales, economic or political turmoil in these countries could adversely affect our sales and results of operations. Our investments in emerg- ing market countries may also be subject to other risks and uncertainties. Our sales, costs and results are affected by exchange rate fl uctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Chinese yuan, the UK pound sterling and the Japanese yen, as well as certain other currencies. » » » » » » Customer fi nancing to network operators can be a competitive requirement and could adversely and materially affect our sales, results of opera- tions, balance sheet and cash fl ow. Allegations of health risks from the electromag- netic fi elds generated by base stations and mo- bile devices, and the lawsuits and publicity relat- ing to them, regardless of merit, could negatively affect our operations by leading consumers to reduce their use of mobile devices or by causing us to allocate monetary and personnel resources to these issues. An unfavorable outcome of litigation could mate- rially impact our business, fi nancial condition or results of operations. If we are unable to recruit, retain and develop appropriately skilled employees, our ability to implement our strategies may be hampered and, consequently, our results of operations may be materially harmed. Changes in various types of regulation in coun- tries around the world could have a material adverse effect on our business. Our share price may be volatile in response to conditions in the global securities markets gener- ally and in the communications and technology sectors in particular. We fi le an annual report on Form 20-F with the US Securities and Exchange Commission, which report also includes a description of risk factors that may affect us. Nokia fi led its Form 20-F annual report for the year ended December 31, 2005 on March 2, 2006. For further information please refer to our Form 20-F annual report. Risk factors Risk factors 67 Corporate governance Pursuant to the provisions of the Finnish Companies Act and our articles of association, the control and management of Nokia is divided among the share- holders in a general meeting, the Board of Directors and the Group Executive Board. Our articles of associa- tion provide for a Group Executive Board, which is responsible for the operative management of Nokia. The Chairman and the members of the Group Execu- tive Board are elected by the Board of Directors. Only the Chairman of the Group Executive Board can be a member of both the Board of Directors and the Group Executive Board. The Board of Directors The operations of the company are managed under the direction of the Board of Directors, within the framework set by the Finnish Companies Act and our articles of association and the complementary Corporate Governance Guidelines and related charters as adopted by the Board. The responsibilities of the Board of Directors The Board represents and is accountable to the share- holders of the company. The Board’s responsibilities are active and not passive and include the responsibil- ity to regularly evaluate the strategic direction of the company, management policies and the effectiveness with which management implements its policies. The Board’s responsibilities further include overseeing the structure and composition of the company’s top management and monitoring legal compliance and the management of risks related to the company’s operations. In doing so the Board may set out annual ranges and/or individual limits for capital expendi- tures, investments and divestitures and fi nancial com- mitments not to be exceeded without Board approval. The Board has the responsibility for appointing and discharging the Chief Executive Offi cer and the President and the other members of the Group Execu- tive Board. Subject to the requirements of Finnish law, the independent directors of the Board will confi rm the compensation and the employment conditions of the Chief Executive Offi cer and the President upon the recommendation of the Personnel Committee. The compensation and employment conditions of the other members of the Group Executive Board are approved by the Personnel Committee. The basic responsibility of the members of the Board is to act in good faith and with due care so as to exercise their business judgment on an informed basis in what they reasonably and honestly believe to be the best interests of the company and its sharehold- ers. In discharging that obligation, the directors must inform themselves of all relevant information reason- ably available to them. Election, composition and meetings of the Board of Directors Pursuant to the articles of association, Nokia Corpora- tion has a Board of Directors composed of a minimum of seven and a maximum of ten members. The members of the Board are elected for a term of one year at each Annual General Meeting, which convenes each March, April or May. Since the Annual General Meeting held on April 7, 2005, the Board has consisted of ten members. Nokia’s CEO, Jorma Ollila, also serves as the Chairman of the Board. The other members of the Board are all non-executive and independent as defi ned under Finnish rules and regulations. In Janu- ary 2006, the Board determined that eight members of the Board are independent, as defi ned in the New York Stock Exchange’s corporate governance listing standards, as amended in November 2004. In addition to the Chairman, Bengt Holmström was determined to be non-independent due to a family relation- ship with an executive offi cer of a Nokia supplier of whose consolidated gross revenues Nokia accounts for an amount that exceeds the limit provided in the NYSE listing standards, but that is less than 10 %. The Board convened thirteen times during 2005, fi ve of the meetings were held by using technical equipment and the average ratio of attendance at the meetings was 98 %. The non-executive directors meet without executive directors twice a year, or more often as they deem appropriate. Such sessions are presided over by the Vice Chairman of the Board or, in his absence, the most senior non-executive member of the Board. In addition, the independent directors meet separately at least once annually. The Board and each committee also has the power to hire independent legal, fi nancial or other advisors as it deems necessary. The Board elects a Chairman and a Vice Chairman from among its members for one term at a time. On April 7, 2005 the Board resolved that Jorma Ollila should continue to act as Chairman and that Paul J. Collins should continue to act as Vice Chairman. The Board also appoints the members and the chairmen for its committees from among its non-executive, independent members for one term at a time. Under Finnish law, if the roles of the Chairman and the Chief Executive Offi cer are combined, the company must have a President. The responsibilities of the President are defi ned in the Finnish Companies Act and other relevant legislation along with any additional guidance and instructions given from time to time by the Board and the Chief Executive Offi cer. The responsibilities of the Chief Executive Offi cer are determined by the Board. The Board conducts annual performance self- evaluations, which also include evaluations of the committees’ work, the results of which are discussed by the Board. The Corporate Governance Guidelines concerning the directors’ responsibilities, the compo- sition and selection of the Board, Board committees and certain other matters relating to corporate gover- nance are available on our website, www.nokia.com. Committees of the Board of Directors The Audit Committee consists of a minimum of three members of the Board, who meet all applicable inde- pendence, fi nancial literacy and other requirements of Finnish law and the rules of the stock exchanges where Nokia shares are listed, including the Helsinki Stock Exchange and the New York Stock Exchange. Since April 7, 2005, the Committee has consisted of the following four members of the Board: Per Karlsson (Chairman), Georg Ehrnrooth, Vesa Vainio and Arne Wessberg. The Board of Directors has determined that Per Karlsson is an ”audit committee fi nancial expert” within the meaning of the US federal securities laws. The Audit Committee is established by the Board primarily for the purpose of overseeing the accounting and fi nancial reporting processes of the company and audits of the fi nancial statements of the company. The Committee is responsible for assisting the Board’s oversight of (1) the quality and integrity of the company’s fi nancial statements and related 68 Nokia in 2005 Corporate governance Management and corporate governance practices We have a company Code of Conduct which is equally applicable to all of our employees, directors and man- agement and is accessible at our website, www.nokia. com. As well, we have a Code of Ethics for the Principal Executive Offi cers and the Senior Financial Offi cers. For more information about our Code of Ethics, please see www.nokia.com. Nokia’s corporate governance practices comply with the Corporate Governance Recommendation for Listed Companies approved by the Helsinki Exchanges in December 2003, effective as of July 1, 2004. The Recommendation recommends a company to describe the manner in which the internal audit function of the company is organized. As Nokia has comprehensive risk management and internal control processes in place, there is no separate internal audit function at Nokia. Corporate governance 69 disclosure, (2) the external auditor’s qualifi cations and independence, (3) the performance of the external auditor subject to the requirements of Finnish law, (4) the performance of the company’s internal controls and risk management and assurance function, and (5) the company’s compliance with legal and regula- tory requirements. The Committee also maintains procedures for the receipt, retention and treatment of complaints received by the company regarding accounting, internal controls, or auditing matters and for the confi dential, anonymous submission by employees of the company of concerns regarding accounting or auditing matters. Under Finnish law, our external auditor is elected by our shareholders at the Annual General Meeting. The Committee makes a recommendation to the shareholders in respect of the appointment of the external auditor based upon its evaluation of the qualifi cations and independence of the auditor to be proposed for election or re-election. The Committee meets at least four times per year based upon a schedule established at the fi rst meet- ing following the appointment of the Committee. The Committee meets separately with the representatives of Nokia’s management and the external auditor at least twice a year. The Audit Committee convened fi ve times in 2005. The Personnel Committee consists of a minimum of three members of the Board, who meet all applicable independence requirements of Finnish law and the rules of the stock exchanges where Nokia shares are listed, including the Helsinki Stock Exchange and the New York Stock Exchange. Since April 7, 2005, the Personnel Committee has consisted of the following four members of the Board: Paul J. Collins (Chairman), Daniel R. Hesse, Marjorie Scardino and Vesa Vainio. The primary purpose of the Personnel Commit- tee is to oversee the personnel policies and practices of the company. It assists the Board in discharging its responsibilities relating to all compensation, including equity compensation, of the company’s executives and the terms of employment of the same. The Committee has overall responsibility for evaluat- ing, resolving and making recommendations to the Board regarding (1) compensation of the company’s top executives and their employment conditions, (2) all equity-based plans, (3) incentive compensation plans, policies and programs of the company affecting executives, and (4) other signifi cant incentive plans. The Committee is responsible for ensuring the above compensation programs are performance-based, properly motivate management, support overall cor- porate strategies and are aligned with shareholders’ interests. The Committee is responsible for the review of senior management development and succession plans. The Personnel Committee convened three times in 2005. The Corporate Governance and Nomination Com- mittee consists of three to fi ve members of the Board, who meet all applicable independence requirements of Finnish law and the rules of the stock exchanges where Nokia shares are listed, including the Helsinki Stock Exchange and the New York Stock Exchange. Since April 7, 2005, the Corporate Governance and Nomination Committee has consisted of the following three members of the Board: Marjorie Scardino (Chair- man), Paul J. Collins and Vesa Vainio. The Corporate Governance and Nomination Committee’s purpose is (1) to prepare the proposals for the general meetings in respect of the composition of the Board along with the director remuneration to be approved by the shareholders, and (2) to monitor issues and practices related to corporate governance and to propose necessary actions in respect thereof. The Committee fulfi lls its responsibilities by (i) actively identifying individuals qualifi ed to become members of the Board, (ii) recommending to the shareholders the director nominees for election at the Annual General Meetings, (iii) monitoring signifi cant developments in the law and practice of corporate governance and of the duties and responsibilities of directors of public companies, (iv) assisting the Board and each committee of the Board in its annual perfor- mance self-evaluations, including establishing criteria to be used in connection with such evaluations, and (v) developing and recommending to the Board and administering the Corporate Governance Guidelines of the company. The Corporate Governance and Nomina- tion Committee convened three times in 2005. The charters of each of the committees are avail- able on our website, www.nokia.com. Corporate governance Compensation of the members of the Board of Directors and the Group Executive Board Board of Directors For the year ended December 31, 2005, the aggregate compensation of the nine non-executive members of the Board of Directors was approximately EUR 1 097 500. Non-executive members of the Board of Directors do not receive stock options or other variable compensation. The remuneration for members of our Board of Directors for each term expiring at the close of the next Annual General Meeting is resolved annually by our Annual General Meeting, after being proposed by the Corporate Governance and Nomination Committee of our Board. The following table depicts the total annual remuneration paid to the members of our Board of Directors, as resolved by the Annual General Meetings in the respec- tive years. Since the fi scal year 1999, approximately 60 % of each Board member’s annual fee has been paid in cash, with the balance in Nokia Corporation shares acquired from the market. Compensation of the Board of Directors 2003 – 2005 Chairman Vice Chairman Other Members Gross annual fee EUR Shares received 1 Gross annual fee EUR Shares received 1 Gross Shares annual fee received 1 EUR Additional annual fees 150 000 4 032 125 000 2 3 360 100 000 2 688 Year 2003 2004 150 000 4 834 125 000 2 4 028 100 000 3 3 223 2005 165 000 5 011 137 500 4 4 175 110 000 5, 6 3 340 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000 Chairman of the Audit Committee and Personnel Committee, each EUR 25 000; Each other member of the Audit Committee, EUR 10 000 1 2 3 As part of the gross annual fee for that year. The 2003 and 2004 fees of Paul Collins amounted to totals of EUR 150 000 per year, consisting of a fee of EUR 125 000 for services as Vice Chairman of the Board and EUR 25 000 for services as Chair- man of the Personnel Committee. As part of the total remuneration, Mr. Collins has received a total of 4 032 Nokia shares in 2003, and 4 834 Nokia shares in 2004. The 2004 fee of Per Karlsson amounted to a total of EUR 125 000, consisting of a fee of EUR 100 000 for services as member of the Board and EUR 25 000 for services as Chairman of the Audit Commit- tee. As part of the total remuneration, Mr. Karlsson has received a total of 4 029 Nokia shares. 4 5 6 The 2005 fee of Paul Collins amounts to a total of EUR 162 500, consisting of a fee of EUR 137 500 for services as Vice Chairman of the Board and EUR 25 000 for services as Chairman of the Personnel Committee. As part of the total remuneration, Mr. Collins has received a total of 4 935 Nokia shares. The 2005 fee of Per Karlsson amounts to a total of EUR 135 000, consisting of a fee of EUR 110 000 for services as member of the Board and EUR 25 000 for services as Chairman of the Audit Commit- tee. As part of the total remuneration, Mr. Karlsson has received a total of 4 100 Nokia shares. The 2005 fee of each of Georg Ehrnrooth, Vesa Vainio and Arne Wessberg amounts to a total of EUR 120 000 consisting of a fee of EUR 110 000 for services as a member of the Board and EUR 10 000 for services as a member of the Audit Committee. As part of the total remuneration, each of them has received a total of 3 644 Nokia shares. Proposal of the Corporate Governance and Nomination Committee of the Board On February 13, 2006, the Nokia Board Corporate Governance and Nomination Committee announced its proposal to the Annual General Meeting on March 30, 2006 that the annual fee payable to members of the Board of Directors to be elected at the Annual General Meeting for the term expiring at the close of the Annual General Meeting in 2007 be as follows: EUR 375 000 for Chairman, EUR 137 500 for Vice Chair- man, and EUR 110 000 for each member. In addition, the Committee will propose that Chairman of the Audit Committee and Chairman of the Personnel Committee will each receive an additional annual fee of EUR 25 000, and each member of the Audit Committee an additional annual fee of EUR 10 000. Further, the Corporate Governance and Nomination Committee proposes that approximately 40 % of the remuneration be paid in Nokia Corporation shares purchased from the market, in accordance with the practice since 1999. As background to the proposal, the Nokia Board Corporate Governance and Nomination Committee notes that the proposed remuneration is on the same level than the remuneration approved by the Annual General Meeting in 2005, except for the remuneration payable to the Chairman of the Board. The Committee proposes that Jorma Ollila continues after June 1, 2006 as a Non-Executive Chairman of the Nokia Board of Directors, and the Committee has received Mr. Ollila’s confi rmation that he is available for this position. As from June 1, 2006, Mr. Ollila will no longer be a Nokia employee and his service contract will terminate as of that date without any severance or other payments by Nokia. Thereafter, he will no longer be eligible for incentives, bonuses, stock options or other equity grants from Nokia. He will be entitled to retain all vested and unvested stock options and other equity compensa- tion granted to him prior to June 1, 2006. Further, following his current contract, he will not be eligible to receive any additional retirement benefi ts from Nokia after June 1, 2006. In addition to the proposed annual remuneration as the Chairman of the Board of Directors he will be entitled to secretarial and offi ce services as well as reimbursement of reasonable expenses directly related to his duties as the Non- Executive Chairman of Nokia Board of Directors. 70 Nokia in 2005 Corporate governance Group Executive Board At December 31, 2005, Nokia had a Group Executive Board consisting of 12 members. Of the Group Executive Board members, Sari Baldauf and J.T. Bergqvist ceased employment with us and resigned as members of the Group Executive Board with effect from January 31, 2005. Pekka Ala-Pietilä and Yrjö Neuvo resigned as members of the Group Executive Board with effect from October 1, 2005, and their employ- ment ceased with us on December 31, 2005 for Dr. Neuvo, and January 31, 2006 for Mr. Ala-Pietilä. The following persons were appointed as new members to the Group Executive Board effective in 2005: Tero Ojanperä was appointed a member effective January 1, 2005, Simon Beresford-Wylie from February 1, 2005, Robert Andersson and Kai Öistämö were appointed members with effect from October 1, 2005. The following tables summarize the aggregate cash compensation paid and the long-term equity-based incentives granted to the members of the Group Execu- tive Board, including Jorma Ollila, Chairman and CEO, for the year 2005. It also shows the long-term equity-based incentives granted in the aggregate under our equity plans in 2005. During 2005, there were no gains realized upon exercise of stock options to report, nor were any share-based incentive grants settled for the members of the Group Executive Board. Cash compensation to the Group Executive Board for 2005 Year 2005 Number of members Dec. 31, 2005 Base salaries EUR Cash incentive payments 1, 2 EUR 12 6 153 422 3 8 531 180 3 1 2 3 Includes payments pursuant to cash incentive arrangements for the 2005 calendar year. The cash incentives are paid as a percentage of annual base salary based on Nokia’s short-term cash incen- tive plan. Excluding any gains realized upon exercise of stock options. Includes base pay and bonuses to Sari Baldauf and J.T. Bergqvist for the period until January 31, 2005, and to Pekka Ala-Pietilä and Yrjö Neuvo until September 30, 2005. The new members entering the Group Executive Board, in 2005, Simon Beresford-Wylie, Kai Öistämö and Robert Andersson, are included for the period of their service in 2005. Tero Ojanperä joined the Group Executive Board effective January 1, 2005, so his cash compensation is fully included. Long-term equity-based incentives granted in 2005 1 Performance shares at threshold 2 (number) Stock options (number) Restricted shares (number) Group Executive Board Other employees 241 000 1 121 000 508 000 4 228 000 7 431 000 2 509 000 Total 4 469 000 8 552 000 3 017 000 Total number of participants 12 600 4 200 300 1 2 The equity-based incentive grants are generally forfeited, if the employment relationship termi- nates with Nokia, and they are conditional upon such performance and other conditions, as deter- mined in the relevant plan rules. For a description of our equity plans, see Note 24 “Share-based payments” to the Consolidated Financial Statements on page 25. At maximum performance, the settlement amounts to four times the number of performance shares originally granted (at threshold). Corporate governance 71 Corporate governance Summary Compensation Table 2005 The annual compensation of our fi ve most highly paid executive offi cers for 2005 is detailed in the following table. The sums include cash incentive payments awarded for the fi scal year 2005 although they will be partially paid in 2006. Name and principal position in 2005 Jorma Ollila, Chairman and CEO Pekka Ala-Pietilä 7 Until October 1, 2005, President of Nokia Corporation and Head of Customer and Market Operations Olli-Pekka Kallasvuo As of October 1, 2005, President and COO Until September 30, 2005, EVP and General Manager of Mobile Phones Cash compensation Base salary EUR 1 500 000 1 475 238 1 400 000 717 000 717 000 711 279 623 524 584 000 575 083 Year 2005 2004 2003 2005 2004 2003 2005 2004 2003 Cash incentive payments 2 EUR 3 212 037 1 936 221 2 253 192 946 332 479 509 520 143 947 742 454 150 505 724 Anssi Vanjoki EVP and General Manager of Multimedia 2005 476 000 718 896 Richard Simonson EVP, Chief Financial Offi cer 2005 461 526 634 516 Other annual compensation EUR All other compensation EUR * * * * * * * * * * * 165 000 6 150 000 150 000 – – – – – – – 358 786 8 1 2 3 4 5 6 7 8 * The equity-based incentive grants are generally forfeited, if the employment relationship terminates with Nokia, and they are conditional upon such performance and other conditions, as determined in the relevant plan rules. For a description of our equity plans, see Note 24 to the Consolidated Financial Statements “Share-based payment” on page 25. Cash incentive payments are based on the performance of the Group and the individual for the fiscal year 2005, and were paid under Nokia’s short-term incentive plan. For the performance share plans 2004 and 2005, the number of performance shares at threshold represents the number of performance shares granted. This number shall vest as shares, should the pre-determined threshold performance levels of the company be met. The maximum number of performance shares shall vest as shares, should the predetermined maximum performance levels be met. The maximum number of performance shares equals four times the number originally granted. The fair value of performance shares equals the estimated fair value on the grant date. The estimated fair value is based on the grant date market price of the company’s share less expected dividends. The value is presented for the target number of shares which is two times the number at threshold. The target number is used for expensing the instruments in the company’s accounting. The fair values of stock options and restricted shares equal the estimated fair value on the grant date. For stock options it is calculated using the Black Scholes model. For restricted shares it is based on the grant date market price of the company’s share less expected dividends. The amount includes EUR 165 000 for his services as Chairman of the Board, of which EUR 99 005 was paid in cash and the balance paid in 5 011 Nokia shares. Pekka Ala-Pietilä served as the President of the company and member of the Group Executive Board until he resigned from these positions effective October 1, 2005. As of this date Mr. Ala-Pietilä held the role of Executive Advisor until January 31, 2006, when he ceased employment with us. For 2006, based on these advisory services, Mr. Ala-Pietilä received a total payment of EUR 101 717. Based on the service contract, Mr. Ala-Pietilä is entitled to receive a payment of EUR 956 000 in 2006 for his commitments during 2006. The amount includes EUR 9 646 company contribution to 401(k), EUR 4 816 company contribution to Restoration and Deferral Plan and EUR 344 324 provided as benefits under Nokia relocation policy. Each executive listed received benefits and perquisites in 2005 not exceeding the lesser of EUR 50 000 or 10% of the executives total compensation. 72 Nokia in 2005 Corporate governance Long-term equity-based incentives granted 1 Performance shares at threshold 3 number Performance shares at maximum 3 number 100 000 100 000 – 15 000 20 000 – 15 000 15 000 – 400 000 400 000 – 60 000 80 000 – 60 000 60 000 – Fair value at grant 4 EUR 2 370 000 2 116 000 – 355 500 423 200 – 355 500 317 400 – Stock options number 400 000 400 000 800 000 60 000 80 000 170 000 160 000 60 000 120 000 Fair value at grant 5 EUR 982 675 1 035 775 2 773 442 147 401 207 155 589 356 407 197 155 366 416 016 Restricted shares number 100 000 100 000 – 35 000 35 000 – 70 000 35 000 – Fair value at grant 5 EUR 1 205 000 1 570 000 – 421 750 549 500 – 932 050 549 500 – 15 000 60 000 355 500 60 000 147 401 35 000 421 750 15 000 60 000 355 500 60 000 147 401 35 000 421 750 Corporate governance 73 Corporate governance Pension arrangements for the members of the Group Executive Board The members the Group Executive Board in 2005 par- ticipate in the local retirement programs applicable to employees in the country where they reside. Execu- tives in Finland participate in the Finnish TEL pension system, which provides for a retirement benefi t based on years of service and earnings according to the prescribed statutory system. Under the Finnish TEL pension system, base pay, incentives and other taxable fringe benefi ts are included in the defi nition of earnings, although gains realized from equity are not. The Finnish TEL pension scheme provides for early retirement benefi ts at age 62. Standard retirement benefi ts are available from ages 63 through 68, ac- cording to an increasing scale. Executives in the United States participate in Nokia’s Retirement Savings and Investment Plan. Under this 401(k) plan, participants elect to make vol- untary pre-tax contributions that are 100 % matched by the company up to 6 % of eligible earnings. The company makes an additional annual discretionary contribution of up to 2 % of eligible earnings. In addi- tion for participants earning in excess of the eligible earning limit, the company offers an additional Resto- ration and Deferral Plan. This plan allows employees to defer up to 50 % of their salary and 100 % of their bonus into a non-qualifi ed plan. The company also makes an annual discretionary contribution to this non-qualifi ed plan of up to 2 % of the earnings above 401(k) eligibility limits. Simon Beresford-Wylie participates in the Nokia International Employee Benefi t Plan (NIEBP). The NIEBP is a defi ned contribution retirement arrangement provided to some Nokia employees on international assignments. The contributions to NIEBP are funded two-thirds by Nokia and one-third by the employee. Because Mr. Beresford-Wylie also participates in the Finnish TEL system, the company contribution to NIEBP is 1.3 % of annual earnings. Jorma Ollila and Olli-Pekka Kallasvuo can as part of their service contract retire at the age of 60 with full retirement benefi t, should they be employed by Nokia at the time. The full retirement benefi t is cal- culated as if the executive had continued his service with Nokia through the statutory retirement age of 65. Mr. Ollila’s service contract will terminate as of June 1, 2006. Following the current contract, he will not be eligible to receive any additional retirement benefi ts from Nokia after that date. Pekka Ala-Pietilä had an equal retirement arrangement during his employ- ment at Nokia and he will not receive any additional retirement benefi ts from Nokia after termination of employment. Hallstein Moerk, following his arrangement with a previous employer, has a retirement benefi t of 65 % of his pensionable salary beginning at the age of 62. Early retirement is possible at the age of 55 with reductions in benefi ts. Service Contract of the Chairman and CEO, of the President and COO, and of the former President We have a service contract with each of Jorma Ollila and Olli-Pekka Kallasvuo. Jorma Ollila’s contract covers his current position as Chairman and CEO, and Chairman of the Group Executive Board. Mr. Ollila’s employment will come to an end on June 1, 2006 based on his request as a result of which the Board of Directors has released him from his duties as CEO and Chairman of the Group Executive Board from that date. As of June 1, 2006, his service contract will terminate without any severance or other payments by Nokia. Thereafter, he will no longer be eligible for incentives, bonuses, stock options or other equity grants from Nokia. He will be entitled to retain all vested and unvested stock options and other equity compensation granted to him prior to June 1, 2006. Further, following his current contract, he will not be eligible to receive any additional retirement benefi ts from Nokia. Olli-Pekka Kallasvuo’s contract covers his current position as President and COO, and his future position as President and CEO, and Chairman of the Group Executive Board, as from June 1, 2006. Mr. Kallasvuo’s annual total gross base salary, which is subject to an annual review by the Board of Directors, is EUR 750 000 starting from October 1, 2005, and will be EUR 1 000 000 from June 1, 2006. His incentive targets under the Nokia short-term incentive plan are 125 % starting from October 1, 2005 and will be 150 % from June 1, 2006. In case of termination by Nokia for rea- sons other than cause, including a change of control, Mr. Kallasvuo is entitled to a severance payment of up to 18 months of compensation (both annual total gross base salary and target incentive). In case of termination by Mr. Kallasvuo, the notice period is 6 months and he is entitled to a payment for such notice period (both annual total gross base salary and target incentive for 6 months). Mr. Kallasvuo is subject to a 12-month non-competition obligation after termina- tion of the contract. Unless the contract is terminated for cause, Mr. Kallasvuo may be entitled to compensa- tion during the non-competition period or a part of it. Such compensation amounts to the annual total gross base salary and target incentive for the respective period during which no severance payment is paid. Mr. Kallasvuo is entitled to a full statutory pension from the date he turns 60 years of age, instead of the statutory age of 65. During 2005, we also had a service contract with Pekka Ala-Pietilä, who acted as President until Octo- ber 1, 2005. Thereafter he acted as Executive Advisor until termination of employment on January 31, 2006. Mr. Ala-Pietilä’s contract had provisions for severance payments for up to 18 months of compensation (both base compensation and bonus) in the event of termina- tion of employment for reasons other than cause. For compensation paid to Mr. Ala-Pietilä pursuant to his ser- vice contract, which has been terminated, see page 72. Equity-based compensation programs General Nokia has today three global stock option plans outstanding, two performance share plans and three restricted share plans. After using broad-based em- ployee stock option plans since 1997, we introduced in 2004 performance shares as the main element to our broad-based equity compensation program, to further emphasize the performance element in employees’ long-term incentives. As part of this change, the num- ber of stock options granted has been signifi cantly reduced since then. From 2003 we have also granted restricted shares to very few selected employees each year. The broad-based equity compensation program in 2005, approved by the Board of Directors, followed the same structure adopted in 2004. The target group 74 Nokia in 2005 Corporate governance for the 2005 equity-based incentive program contin- ued to be broad with a wide number of employees in many levels of the organization eligible to participate. The rationale for using a combination of both per- formance shares and stock options for employees in higher job grades is to build an optimal and balanced combination of equity-based incentives. The program aligns the potential value received by participants directly with the performance of the company. The equity-based incentive grants are conditional upon continued employment with Nokia, as well as the fulfi llment of the performance related and other conditions, as determined in the relevant plan rules. The aggregate number of participants in all of our equity-based programs in 2005 was approximate- ly 34 000, which is similar as to the number in 2004. For a more detailed description of all of our equity-based incentive plans, see Note 24 to the Consolidated Financial Statements “Share-based pay- ment” on page 25. Performance Shares We have granted performance shares under the 2004 and 2005 plans, which have been approved by the Board of Directors. The performance shares represent a commitment by the company to deliver Nokia shares to employees at a future point in time, subject to the company’s fulfi llment of pre-defi ned performance criteria. No performance shares will vest unless the company performance reaches at least one of the threshold levels measured by two independent, pre- defi ned performance criteria: the company’s average annual net sales growth and earnings per share (“EPS”) growth (basic) for the four year performance period of the plan. For the 2004 plan the performance period consists of the fi scal years 2004 through 2007, with an interim payout possible after 2005, and for the 2005 plan the years 2005 through 2008, with an interim payout possible after 2006. For both the 2004 and 2005 plans, if the required performance level is achieved, the fi rst payout will take place after a two-year interim measurement pe- riod. The second and fi nal payout, if any, will be after the close of the four-year performance period. Stock Options Nokia’s outstanding global stock option plans have been approved by the Annual General Meetings in the year when the plan was launched, i.e. in 2001, 2003 and 2005. Each stock option entitles the holder to subscribe for one new Nokia share with a par value of EUR 0.06. Under the 2001 stock option plan the stock options are transferable by the participants. Under the 2003 and 2005 plans the stock options are non-transferable. All of the stock options have a quarterly staggered vesting schedule, which has been Nokia’s policy since 2001. The subcategories of stock options under the plans have a life of approximately fi ve years. The exercise prices are determined at the time of the grant, on a quarterly basis equaling the trade volume weighted average price of the Nokia share on the Helsinki Stock Exchange during the trading days of the fi rst whole week of the second month (i.e. February, May, August or November) of the respective calendar quarter. Restricted Shares Since 2003 we have granted restricted shares to recruit, retain, reward and motivate selected high potential employees, who are critical to the future success of Nokia. It is the Personnel Committee’s phi- losophy that restricted shares will be used only for key management positions and other critical resources. The 2003, 2004 and 2005 restricted share plans have been approved by the Board of Directors. All of our restricted share plans have a restriction period of three years after grant. As the shares vest, they will be transferred and delivered to the recipi- ents. Until the shares are transferred and delivered, the recipients will not have any shareholder rights, such as voting or dividend rights associated with these restricted shares. Other Equity Plans for Employees In addition to our global stock option plans described above, we have minor stock option plans for Nokia employees in the U.S. and Canada which do not result in an increase of the share capital of Nokia Corpora- tion under which option holders receive Nokia ADSs. Also we have an Employee Share Purchase Plan in the United States, which permits all full-time Nokia em- ployees located in the United States to acquire Nokia ADSs at a 15 % discount. The ADSs to be purchased are funded through monthly payroll deductions from the salary of the participants, and the ADSs are purchased on a monthly basis. As of December 31, 2005, a total of 1 866 518 ADSs had been purchased under the plan since its inception, and there were a total of ap- proximately 1 000 participants. For more information of these plans, see Note 24 “Share-based payment” to the Consolidated Financial Statements on page 25. Equity-based compensation program 2006 Nokia’s Equity Program 2006 The Board of Directors announced its proposed scope and design for the 2006 Equity Program on January 26, 2006. The main equity instrument in 2006 will be performance shares. In addition, stock options will be granted to a more limited population, and restricted shares will be used for a small number of high poten- tial and critical employees. The Performance Share Plan in 2006 will cover a performance period of three years (2006 – 2008) with no interim measurement period as compared with the 2004 and 2005 plans with a four-year performance periods and two-year interim measurement periods. No performance shares will vest unless the company performance reaches at least one of the threshold levels measured by two independent, pre-defi ned per- formance criteria: the company’s average annual net sales growth and earnings per share (“EPS”) (basic) growth for 2006 to 2008. The performance criteria of the Performance Share Plan 2006 are: 1 2 Average Annual Net Sales Growth: 5 % (threshold) and 20 % (maximum), and Annual EPS Growth: EUR 0.96 (threshold) and EUR 1.41 in 2008 (maximum). EPS growth is calculated based on the compounded annual growth rate over the performance period (2006 – 2008) compared to 2005 EPS of 0.83. Average Annual Net Sales Growth is calculated as an average of Corporate governance 75 Corporate governance the net sales growth rates for the years 2005 through 2008. Both the EPS and Average Annual Net Sales Growth criteria are equally weighted and performance under each of the two performance criteria are calcu- lated independent of each other. Achievement of the maximum performance for both criteria will result in the vesting of the maximum of 32.6 million Nokia shares. Performance exceeding the maximum criteria does not increase the number of performance shares that will vest. Achievement of the threshold performance for both criteria, will result in the vesting of 8.15 million shares. If only one of the threshold levels of performance are achieved, only 4.08 million of the performance shares will vest. If none of the threshold levels are achieved, then none of the performance shares will vest. For performance between the threshold and maximum performance levels the settlement follows a linear scale. If the required performance levels are achieved, the settle- ment will take place in 2009. Until the shares are transferred and delivered, the recipients will not have any shareholder rights, such as voting or dividend rights associated with these performance shares. or, subject to the Board’s decision, a monthly basis. The intention is to determine the exercise prices at fair market value. The share subscription price for each subcategory of stock options to be issued will equal the trade volume weighted average price of Nokia shares on the Helsinki Stock Exchange for the fi rst whole week of the second month of the calendar quarter (i.e. February, May, August or November) or, for the monthly priced stock options that are priced monthly, the fi rst whole week of such calendar month when the subcategory of the stock option has been denominated. The stock options will have a quarterly staggered vesting schedule. The subcategories of stock options to be issued under the plan will have a life of approximately fi ve years, with the last of the subcategories expiring as of December 31, 2011. The restricted shares to be granted under the Restricted Share Plan 2006 will have a three-year restriction period. The restricted shares will be delivered in 2009, subject to fulfi lling the restriction criteria. Shares are not eligible for any shareholder rights or voting rights during the restriction period, until transferred to plan participants. The stock options to be granted in 2006 will be The maximum number of planned grants under primarily out of the Stock Option Plan 2005, approved by the Annual General Meeting, on April 7, 2005. Each stock option would entitle the option holder to subscribe for one newly issued Nokia share. The share subscription price applicable upon exercise of the stock options will be determined on a quarterly the 2006 Equity Program (i.e. performance shares, stock options and restricted shares) are depicted in the table below. The planned amounts for 2006 are in line with the total amounts approved and disclosed in 2005. Number of planned grants in 2006 (number, millions) Plan type Annual grants 2006 Recruitment and special retention needs Stock Options Restricted Shares Performance Shares at Threshold 1 8.90 2.30 4.50 7.90 7.20 3.65 1 The maximum number of shares to be delivered at maximum performance is four times the number originally granted (at threshold). Total 16.80 9.50 8.15 As of December 31, 2005, the total dilution effect of Nokia’s stock options, performance shares and restricted shares currently outstanding, assuming full dilution, is approximately 4.2 % in the aggregate. The potential maximum effect of the proposed new program, including the impact of the equity grants in connection with the acquisition of Intellisync Inc., would be approximately another 1.4 %. Cash Incentive Plans In addition to equity-based compensation programs we also provide our executives and employees with cash incentive payments through our comprehensive cash incentive plans. These performance-based cash incentives include individual, team and project/pro- gram incentive payments as well as the Nokia Con- necting People bonus. Share ownership The following section describes the ownership, or potential ownership interest in the company of the members of our Board of Directors and the Group Executive Board, either through share ownership or through holding of equity based incentives, which may lead to a share ownership in the future. The members of the Board of Directors do not receive stock options or any other form of variable pay from the company, with the exception of Jorma Ollila, Chair- man and CEO. His holdings of equity based incentives are accounted for below under the Group Executive Board, see page 78 “Management stock option owner- ship” and page 80 “Performance Shares and Restricted Shares”. Daniel R. Hesse and Edouard Michelin were elected as new members to the Board of Directors by the Annual General Meeting on April 7, 2005. Of the Group Executive Board members, Sari Baldauf and J.T. Bergqvist ceased employment with us and resigned from the Group Executive Board with effect from January 31, 2005. Pekka Ala-Pietilä and Yrjö Neuvo resigned from the Group Executive Board with effect from October 1, 2005. Ala-Pietilä served as Executive Advisor for Nokia from October 1, 2005 until January 31, 2006, while Yrjö Neuvo retired at the end of 2005. The following persons were appointed as new members to the Group Executive Board effective in 2005: Tero Ojanperä was appointed a member with ef- fect from January 1, 2005, Simon Beresford-Wylie from February 1, 2005, Robert Andersson and Kai Öistämö effective October 1, 2005. On December 31, 2005, the members of our Board of Directors held the aggregate of 750 952 shares and ADS’s in the company, which represented 0.018 % of our outstanding share capital and total voting rights excluding shares held by the Group as of that date. The following table depicts the share ownership as well as other potential ownership interests in the company based on long-term equity incentives of the members of our Group Executive Board, in relation to the company’s outstanding share capital and total voting rights as of December 31, 2005. 76 Nokia in 2005 Corporate governance Group Executive Board, ownership of shares and equity-based incentives, December 31, 2005 Performance shares at threshold 418 800 7 624 017 8 042 817 % 2 4.586 95.414 100 % 2 Restricted shares 5.207 94.793 923 000 4 262 676 100 5 185 676 % 2 17.799 82.201 100 Shares % 1 Stock options Group Executive Board 632 833 0.015 6 626 157 Other employees * * 137 869 030 4 Total 144 495 187 1 2 3 4 * The percentage is calculated in relation to the outstanding share capital and total voting rights of the company as of December 31, 2005, excluding shares held by the Group as of that date. The percentage is calculated in relation to the total outstanding equity plans, i.e. stock options, performance shares and restricted shares, as applicable, as of December 31, 2005. Performance shares at threshold represent the original grant. At maximum performance, the settle- ment amounts to four times the number of performance shares originally granted (at threshold). The number includes the total number of stock options outstanding, consisting of 128 091 354 options held by other employees and 9 777 676 options sold to the market. no information available. Shares The following two tables set forth the number of shares and ADSs benefi cially held by members of the Board of Directors and the Group Executive Board as of Decem- ber 31, 2005. Board of Directors Shares 1 ADSs Group Executive Board Shares ADSs Jorma Ollila 2 Paul J. Collins Georg Ehrnrooth 3 Daniel R. Hesse Bengt Holmström Per Karlsson 3 Edouard Michelin Marjorie Scardino Vesa Vainio Arne Wessberg Total 231 433 0 Robert Andersson 0 119 145 Simon Beresford-Wylie 312 426 0 Olli-Pekka Kallasvuo 0 3 340 Pertti Korhonen 14 250 16 646 4 870 0 0 0 Mary McDowell Hallstein Moerk Tero Ojanperä 0 11 662 Richard Simonson 25 214 11 966 0 0 Veli Sundbäck Anssi Vanjoki 616 805 134 147 Kai Öistämö Group Executive Board Total 1, 2 15 000 1 000 100 000 15 300 0 0 0 0 0 5 000 14 100 0 0 125 000 106 000 0 0 0 20 000 0 0 0 376 400 25 000 1 2 3 The number of shares includes not only shares acquired as compensation for services rendered as a member of the Board of Directors, but also shares acquired by any other means. For Mr. Ollila’s holdings of long-term equity-based incentives, see “Stock Options ownership of the Group Executive Board, December 31, 2005” on page 78 and “Performance Shares and Restricted Shares” on page 80. Mr. Ehrnrooth’s and Mr. Karlsson’s holdings include both shares held personally and shares held through a company. 1 2 Mr. Ala-Pietilä resigned as member of the Group Executive Board effective October 1, 2005, and ceased employment with us on January 31, 2006. He held 49 600 shares as of December 31, 2005. Dr. Neuvo resigned as member of the Group Executive Board effective October 1, 2005, and ceased employment with us, effective December 31, 2005. He held 74 540 shares as of December 31, 2005. Corporate governance 77 Corporate governance Management stock option ownership The following tables provide certain information relating to stock options held by members of the Group Executive Board as of December 31, 2005. These stock options were issued pursuant to our Nokia Stock Option Plans 2001, 2003 and 2005. For a description of our stock option plans, including information regarding the expiration date of the options under these plans, please see the table “Outstanding stock option plans of the Group, December 31, 2005” in Note 24 to the Consolidated Financial Statements on page 25. Stock option ownership of the Group Executive Board, December 31, 2005 Number of stock options 1 Total realisable value of stock options, December 31, 2005 EUR 2 Exercise price per share EUR Exercisable Unexercisable Exercisable 3 Unexercisable 36.75 26.67 17.89 14.95 11.79 12.79 36.75 26.67 17.89 14.95 11.79 12.79 14.48 36.75 26.67 17.89 14.95 11.79 12.79 14.48 36.75 26.67 17.89 14.95 11.79 12.79 36.75 26.67 17.89 14.95 11.79 12.79 15.05 11.79 12.79 1 000 000 468 750 812 500 450 000 125 000 0 100 000 46 875 142 183 67 500 18 750 0 0 21 500 10 068 24 375 10 125 3 250 0 0 14 000 6 557 11 375 7 310 3 125 0 30 000 14 057 56 875 28 125 15 625 0 30 625 15 625 0 0 31 250 187 500 350 000 275 000 400 000 0 3 125 32 817 52 500 41 250 60 000 100 000 0 682 5 625 7 875 7 150 12 000 28 000 0 443 2 625 5 690 6 875 60 000 0 943 13 125 21 875 34 375 60 000 39 375 34 375 60 000 0 0 0 0 0 0 225 000 457 500 0 175 000 1 006 500 1 064 000 0 0 0 33 750 68 625 0 0 0 0 0 5 063 11 895 0 0 0 0 0 3 655 11 438 0 0 0 0 14 063 57 188 0 12 250 57 188 0 0 0 0 26 250 150 975 159 600 97 000 0 0 0 3 938 26 169 31 920 27 160 0 0 0 2 845 25 163 159 600 0 0 0 10 938 125 813 159 600 15 750 125 813 159 600 Stock option category 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2005 4Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2005 4Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2003 4Q 2004 2Q 2005 2Q Jorma Ollila Olli-Pekka Kallasvuo Robert Andersson Simon Beresford-Wylie Pertti Korhonen Mary McDowell 78 Nokia in 2005 Stock option ownership of the Group Executive Board, December 31, 2005, continued Corporate governance Hallstein Moerk Tero Ojanperä Richard Simonson Veli Sundbäck Anssi Vanjoki Kai Öistämö Number of stock options 1 Total realisable value of stock options, December 31, 2005 EUR 2 Stock option category Exercise price per share EUR Exercisable Unexercisable Exercisable 3 Unexercisable 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 C 3Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2005 4Q 36.75 26.67 17.89 14.95 11.79 12.79 36.75 26.67 17.89 14.95 11.79 12.79 20.61 17.89 14.95 11.79 12.79 36.75 26.67 17.89 14.95 11.79 12.79 36.75 26.67 17.89 14.95 11.79 12.79 36.75 26.67 17.89 14.95 11.79 12.79 14.48 30 000 14 057 24 375 11 250 9 375 0 12 500 5 852 11 779 9 000 3 125 0 36 000 12 183 6 465 15 625 0 40 000 18 750 32 500 28 125 9 375 0 70 000 32 807 81 250 56 250 18 750 0 2 695 2 013 4 029 6 465 3 125 0 0 0 943 5 625 8 750 20 625 40 000 0 398 2 721 7 000 6 875 40 000 0 2 817 5 035 34 375 60 000 0 1 250 7 500 21 875 20 625 40 000 0 2 193 18 750 43 750 41 250 60 000 0 682 4 038 5 035 6 875 12 800 28 000 0 0 0 5 625 34 313 0 0 0 0 4 500 11 438 0 0 0 3 233 57 188 0 0 0 0 14 063 34 313 0 0 0 0 28 125 68 625 0 0 0 0 3 233 11 438 0 0 0 0 0 4 375 75 488 106 400 0 0 0 3 500 25 163 106 400 0 0 2 518 125 813 159 600 0 0 0 10 938 75 488 106 400 0 0 0 21 875 150 975 159 600 0 0 0 2 518 25 163 34 048 27 160 Stock options held by the members of the Group Executive Board on December 31, 2005, Total 4 4 141 895 2 484 262 1 233 703 4 777 050 All outstanding stock option plans, Total 110 863 400 33 631 787 15 213 285 22 249 290 1 2 3 Number of stock options equals the number of underlying shares represented by the option entitlement. The realizable value of the stock options is based on the difference between the exercise price of the options and the closing market price of Nokia shares on the Helsinki Stock Exchange as of December 30, 2005 of EUR 15.45. During 2005, there were no gains realized upon exercise of stock options to report, nor were any share-based incentive grants settled for the members of the Group Executive Board. 4 Mr. Ala-Pietilä resigned as member of the Group Executive Board effective October 1, 2005, and ceased employment with us on January 31, 2006. Dr. Yrjö Neuvo resigned as member of the Group Executive Board effective October 1, 2005, and retired from Nokia effective December 31, 2005. The information relating to stock options held and retained by Mr. Ala-Pietilä and Dr. Neuvo as of the date of termination of employment is represented in the table on page 80. Corporate governance 79 Corporate governance Number of stock options a Total realisable value of stock options EUR b, c Realized gains in 2005 on stock options exercised d Exercise price per share EUR 36.75 26.67 17.89 14.95 11.79 12.79 36.75 26.67 17.89 14.95 11.79 Stock option category 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q 2005 2Q 2001 A/B 2001 C 4Q/01 2002 A/B 2003 2Q 2004 2Q Exercisable Unexercisable Exercisable Unexercisable 0 7 818 15 625 0 30 000 0 70 000 32 807 56 875 22 500 6 250 0 0 0 0 0 0 0 2 193 13 125 17 500 13 750 0 0 0 0 97 800 0 0 0 0 11 250 22 875 0 0 0 0 0 0 0 0 0 8 750 50 325 Number of options 250 000 117 182 203 125 0 0 0 0 0 0 0 0 Gains EUR 5 6 356 145 448 0 0 0 0 0 0 0 0 Pekka Ala-Pietilä (Information as per January 31, 2006) Yrjö Neuvo (Information as per December 31, 2005) a b c d Number equals the number of underlying shares represented by the option entitlement. For Dr. Neuvo the realisable value of the stock options is based on the difference between the exer- cise price of the options and the closing market price of Nokia shares on the Helsinki Stock Exchange as of December 30, 2005, which was EUR 15.45. For Mr. Ala-Pietilä the realisable value of the stock options is based on the difference between the exercise price of the options and the closing market price of Nokia shares on the Helsinki Stock Exchange as of January 31, 2006, which was EUR 15.05. Realized gains in 2005 represent the total gross value received in 2005 in respect of options sold over the Helsinki Stock Exchange (transferable stock options). Performance shares and restricted shares The following table provides certain information relating to performance shares and restricted shares held by members of the Group Executive Board as of Decem- ber 31, 2005. These entitlements were granted pursuant to our performance share plans 2004 and 2005 and restricted share plans 2003, 2004 and 2005. For a descrip- tion of our performance share and restricted share plans, see Note 24 “Share-based payment” to the Consolidated Financial Statements on pages 25 – 28. Performance Shares Performance shares at Performance shares at threshold 2 maximum 2 number number 100 000 100 000 15 000 15 000 2 600 3 000 2 500 15 000 12 500 15 000 400 000 400 000 60 000 60 000 10 400 12 000 10 000 60 000 50 000 60 000 Jorma Ollila Olli-Pekka Kallasvuo Robert Andersson Simon Beresford-Wylie Pertti Korhonen Plan name 1 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 80 Nokia in 2005 Value December 31, 2005 3 EUR 3 090 000 3 090 000 463 500 463 500 80 340 92 700 77 250 463 500 386 250 463 500 Restricted Shares Value Number of December 31, 2005 5 restricted EUR shares 100 000 100 000 35 000 70 000 15 000 28 000 1 545 000 1 545 000 540 750 1 081 500 231 750 432 600 22 000 339 900 35 000 540 750 35 000 25 000 35 000 540 750 386 250 540 750 Plan name 4 2004 2005 2004 2005 2004 2005 2003 2005 2003 2004 2005 Corporate governance Restricted Shares Value Number of December 31, 2005 5 restricted EUR shares 20 000 309 000 35 000 540 750 26 000 20 000 25 000 15 000 25 000 33 250 25 000 35 000 20 000 25 000 35 000 35 000 8 750 15 000 25 000 401 700 309 000 386 250 231 750 386 250 513 713 386 250 540 750 309 000 386 250 540 750 540 750 135 188 231 750 386 250 Plan name 4 2003 2005 2003 2004 2005 2004 2005 2003 2004 2005 2004 2005 2004 2005 2003 2004 2005 Value December 31, 2005 3 EUR 386 250 463 500 231 750 309 000 77 250 309 000 386 250 463 500 231 750 309 000 463 500 463 500 77 250 98 880 Performance Shares Performance shares at Performance shares at threshold 2 maximum 2 number number 12 500 15 000 7 500 10 000 2 500 10 000 12 500 15 000 7 500 10 000 15 000 15 000 2 500 3 200 50 000 60 000 30 000 40 000 10 000 40 000 50 000 60 000 30 000 40 000 60 000 60 000 10 000 12 800 Mary McDowell Hallstein Moerk Tero Ojanperä Richard Simonson Veli Sundbäck Anssi Vanjoki Kai Öistämö Plan name 1 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 Performance shares and Restricted shares held by the Group Executive Board, Total 6, 7 All outstanding Performance shares and Restricted shares, Total 418 800 1 675 200 12 940 920 923 000 14 260 350 8 042 817 32 171 268 248 523 045 5 185 676 80 118 694 1 2 3 4 The performance period for the 2004 plan is 2004 – 2007, with one interim measurement period for fiscal years 2004 – 2005. Similarily, the performance period for the 2005 Plan is 2005 – 2008, with one interim measurement period for fiscal years 2005 – 2006. 5 6 Value is based on the closing market price of the Nokia share on the Helsinki Stock Exchange as of December 30, 2005 of EUR 15.45. Pekka Ala-Pietilä resigned as member of the Group Executive Board as of October 1, 2005, and ceased employment with us on January 31, 2006. For the performance share plans 2004 and 2005, the number of performance shares at threshold represents the number of performance shares granted. This number shall vest as shares, should the pre-determined threshold performance levels of the company be met. The maximum number of performance shares shall vest as shares, should the predetermined maximum performance levels be met. The maximum number of performance shares equals four times the number originally granted. Value is based on the closing market price of the Nokia share on the Helsinki Stock Exchange as of December 30, 2005 of EUR 15.45. The value is presented for the target number of shares, which is two times the number at threshold. The target number is used for expensing the instruments in the company’s accounting. Restriction period ends for the restricted share plan 2003 on October 1, 2006 (Vesting Date). Vesting Date for the 2004 plan is October 1, 2007, and for the 2005 plan October 1, 2008. As of December 31, 2005 he held 35 000 restricted shares from each of the 2004 and 2005 Restricted Share Plans, 20 000 performance shares at threshold from the 2004 Performance Share Plan and 15 000 performance shares at threshold from the 2005 Performance Share Plan. He forfeited all his performance shares and restricted shares in accordance with the relevant plan rules. 7 Yrjö Neuvo resigned as member of the Group Executive Board effective October 1, 2005, and retired from Nokia as of December 31, 2005. As of December 31, 2005 he held 5 000 performance shares at threshold from 2004 Performance Share Plan. He was entitled to keep all his performance shares in accordance with the relevant plan rules. Corporate governance 81 Corporate governance Stock ownership guidelines for Executive Management One of the goals of our long-term equity-based incentive program is to focus execu- tives on building value for shareholders. In addition to granting them stock options, performance shares and restricted shares, we also encourage stock ownership by our top executives. In January 2001, we introduced a stock ownership commitment guidelines with minimum recommendations tied to annual base salaries. For the members of the Group Executive Board, the recommended minimum investment in our shares corresponds to two times the member’s annual base salary. For Mr. Kallas- vuo, who has already met this requirement as of the end of 2005, the Board of Directors has set a new recommended minimum ownership guideline of three times his annual base salary. To meet this requirement, all members are expected to retain after-tax equity gains in shares until the same minimum investment level is met. Insiders’ trading in securities The Board of Directors has established a policy in respect of insiders’ trading in Nokia securities. Under the policy, the holdings of Nokia securities by the primary insiders (as defi ned in the policy) are public information, which is available in the Finnish Central Securities Depositary and on the company’s website. Both primary insiders and secondary insiders (as defi ned in the policy) are subject to a number of trading restrictions and rules, including among other things, prohibitions on trad- ing in Nokia securities during the three-week “closed-window” period immediately preceding the disclosure of our quarterly results and the four-week “closed- window” period immediately preceding the disclosure of our annual results. In addition, Nokia may set trading restrictions based on participation in projects. We update our insider trading policy from time to time and monitor our insiders’ com- pliance with the policy on a regular basis. Nokia’s Insider Policy is in line with the Helsinki Stock Exchange Guidelines for Insiders and also sets requirements beyond these guidelines. 82 Nokia in 2005 Auditor fees and services PricewaterhouseCoopers Oy has served as Nokia’s independent auditor for each of the fi scal years in the three-year period ended December 31, 2005. The independent auditor is elected annually by the Annual General Meeting. The Audit Committee will propose to the Annual General Meeting convening on March 30, 2006 that Pricewa- terhouseCoopers Oy be elected as the independent auditor for 2006. The following table presents the aggregate fees for professional services and other services rendered by PricewaterhouseCoopers to Nokia in 2005 and 2004. EURm Audit fees 1 Audit-related fees 2 Tax fees 3 All other fees 4 Total 2005 2004 5.3 1.0 5.9 0.1 12.3 4.2 1.0 5.0 0.3 10.5 1 2 3 4 Audit Fees consist of fees billed for the annual audit of the company’s consolidated financial state- ments and the statutory financial statements of the company’s subsidiaries. They also include fees billed for other audit services, which are those services that only the independent auditor reasonably can provide, and include the provision of comfort letters and consents and the review of documents filed with the SEC and other capital markets or local financial reporting regulatory bodies. The fees for 2005 include EUR 1.4 million of accrued audit fees for the 2005 year-end audit that were not billed until 2006; the fees for 2004 include EUR 0.8 million of accrued audit fees for the 2004 year-end audit that were not billed until 2005. Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the company’s financial statements or that are traditionally performed by the independent auditor, and include consultations concerning financial accounting and reporting standards; internal control matters and services in anticipation of the company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002; advice and assistance in connection with local statutory accounting requirements; due diligence related to acquisitions; and employee benefit plan audits and reviews; and miscellaneous reports in connection with grant applications. Tax Fees include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, tax advice related to mergers and acquisitions, transfer pricing, and requests for rulings or technical advice from taxing authorities; tax planning services; and expatriate tax compliance, consultation and planning services. All Other Fees include fees billed for company establishment, forensic accounting and occasional training services and, in 2004 only, for advisory services in connection with the outsourcing of an operational process and forensic accounting related to internal investigations. Audit committee pre-approval policies and procedures The Audit Committee of Nokia’s Board of Directors is responsible, among other mat- ters, for the oversight of the external auditor subject to the requirements of Finnish law. The Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by our independent auditors (the “Policy”). Under the Policy, proposed services either (i) may be pre-approved by the Audit Committee without consideration of specifi c case-by-case services (“general pre- approval”); or (ii) require the specifi c pre-approval of the Audit Committee (“specifi c pre-approval”). The Audit Committee may delegate either type of pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, including internal control, tax and other services that have re- ceived the general pre-approval of the Audit Committee, which services are subject to annual review by the Audit Committee. All other audit, audit-related, including internal control, tax and other services must receive a specifi c pre-approval from the Audit Committee. The Audit Committee establishes budgeted fee levels annually for each of the four categories of audit and non-audit services that are pre-approved under the Policy, namely, audit, audit-related, tax and other services. Requests or applica- tions to provide services that require specifi c approval by the Audit Committee are submitted to the Audit Committee by both the independent auditor and the Chief Financial Offi cer. At each regular meeting of the Audit Committee, the independent auditor provides a report in order for the Audit Committee to review the services that the external auditor is providing, as well as the status and cost of those services. Investor information Information on the Internet www.nokia.com/investor Investor relations contacts investor.relations@nokia.com Available on the Internet: fi nancial reports, Nokia management’s presentations, conference call and other investor related material, press releases as well as environmental and social information. Nokia Investor Relations 102 Corporate Park Drive White Plains, NY 10604-3802 USA Tel. +1 914 368 0555 Fax +1 914 368 0600 Nokia Investor Relations P.O. Box 226 FIN-00045 NOKIA GROUP Finland Tel. +358 7180 34927 Fax +358 7180 38787 Annual General Meeting Date: Thursday March 30, 2006 at 3:00 pm Address: Helsinki Fair Centre, Messuaukio 1, Helsinki, Finland Dividend Dividend proposed by the Board of Directors for 2005 is EUR 0.37 per share. The dividend record date is proposed to be April 8, 2006 and pay date April 21, 2006. Stock exchanges The shares of Nokia Corporation are quoted on the following stock exchanges: HEX, Helsinki (quoted since 1915) Stockholmsbörsen (1983) Frankfurter Wertpapierbörse (1988) New York Stock Exchange (1994) Symbol NOK1V NOKI NOA3 NOK Trading currency EUR SEK EUR USD Financial reporting Nokia’s quarterly reports in 2006 are planned for April 20, July 20, and October 19. The 2006 results are planned to be published in January 2007. List of indices NOK1V NOKI NOK Information published in 2005 All Nokia’s press releases published in 2005 are available on the Internet at www.nokia.com. HEX HEX General Index OMX Stockholm NYA NYSE Composite HEXTELE HEX Telecommunications GENX Swedish General NNA NYSE Utilities HEX 25 HEX 25 Index GENX04 Swedish Engineer NN NYSE Utilities BE500 Bloomberg Europe GENX16 Swedish SX 16 Index CTN CSFB Technology BETECH BBG Europe Technology SX5E DJ Euro STOCXX 50 SX5P DJ Europe STOXX SX__ Various other DJ Indices E300 FTSE Eurotop 300 MLO Merrill Lynch Tech 10 It should be noted that certain statements herein which are not his- market trends and to respond timely and successfully to the needs of that our operations rely on; 15) our ability to protect the complex torical facts, including, without limitation, those regarding: A) the our customers; 4) the impact of changes in technology and our ability technologies that we or others develop or that we license from claims timing of product and solution deliveries; B) our ability to develop, to develop or otherwise acquire complex technologies as required by that we have infringed third parties’ intellectual property rights, as implement and commercialize new products, solutions and tech- the market, with full rights needed to use; 5) competitiveness of our well as our unrestricted use on commercially acceptable terms of cer- nologies; C) expectations regarding market growth, developments product portfolio; 6) timely and successful commercialization of new tain technologies in our products and solution offerings; 16) general and structural changes; D) expectations regarding our mobile device advanced products and solutions; 7) price erosion and cost manage- economic conditions globally and, in particular, economic or political volume growth, market share and prices, E) expectations and targets ment; 8) the intensity of competition in the mobile communications turmoil in emerging market countries where we do business; 17) de- for our results of operations; F) the outcome of pending and threat- industry and our ability to maintain or improve our market position velopments under large, multi-year contracts or in relation to major ened litigation; and G) statements preceded by “believe,” “expect,” and respond to changes in the competitive landscape; 9) our ability customers; 18) exchange rate fluctuations, including, in particular, “anticipate,” “foresee,” “target,” “designed” or similar expressions to manage efficiently our manufacturing and logistics, as well as to fluctuations between the euro, which is our reporting currency, and are forward-looking statements. Because these statements involve ensure the quality, safety, security and timely delivery of our prod- the US dollar, the Chinese yuan, the UK pound sterling and the Japa- risks and uncertainties, actual results may differ materially from the ucts and solutions; 10) inventory management risks resulting from nese yen; 19) the management of our customer financing exposure; results that we currently expect. Factors that could cause these dif- shifts in market demand; 11) our ability to source quality components 20) our ability to recruit, retain and develop appropriately skilled em- ferences include, but are not limited to: 1) the extent of the growth without interruption and at acceptable prices; 12) our success in col- ployees; and 21) the impact of changes in government policies, laws of the mobile communications industry, as well as the growth and laboration arrangements relating to development of technologies or or regulations; as well as 22) the risk factors specified on pages 12 – 22 profitability of the new market segments within that industry which new products and solutions; 13) the success, financial condition and of the company’s annual report on Form 20-F for the year ended De- we target; 2) the availability of new products and services by network performance of our collaboration partners, suppliers and customers; cember 31, 2005 under “Item 3.D Risk Factors.” operators and other market participants; 3) our ability to identify key 14) any disruption to information technology systems and networks Investor information 83 Contact information Nokia Head Offi ce Keilalahdentie 2 – 4 FIN-02150 Espoo P.O. Box 226 FIN-00045 Nokia Group Finland Tel. +358 (0) 7180 08000 Nokia Corporate Offi ce 6000 Connection Drive Irving, Texas 75039 USA Tel. +1 972 894 5000 Fax +1 972 894 5106 Nokia Corporate Offi ce – New York 102 Corporate Park Drive White Plains, NY 10604-3802 USA Tel. +1 914 368 0400 Fax +1 914 368 0500 Nokia Asia-Pacifi c 438B Alexandra Road #07 – 00 Alexandra Technopark Singapore 119968 Tel. +65 6723 2323 Fax +65 6723 2324 . y O m ö r t s o B e s i u o L : r e v o c , y O e s u o H g n i k r o W d r a H : n g i s e D . 6 0 0 2 , 1 0 0 9 O S I g r e b n n ö L . G F . 2 m / g 0 0 1 x n y L n e k n u M : r e p a P 2 m / g 0 4 2 x n y L n e k n u M : r e v o C . n o i t a r o p r o C a i k o N f o s k r a m e d a r t d e r e t s i g e r e r a e l p o e P g n i t c e n n o C a i k o N d n a a i k o N . d e v r e s e r s t h g i r l l A . n o i t a r o p r o C a i k o N . 6 0 0 2 © t h g i r y p o C