Review on 2020 Annual Accounts of Nokia Corporation

 

The position of auditor's report on 2020 annual accounts is on page 212 behind financial statements. Nokia's managers are downplaying the importance of auditor's report on corporate governance.I don't know why Nokia did so. Deloitte delivered an unmodified audit opinion on the financial statements prepared with International Financial Reporting Standards as adopted in EU. But the auditor mentioned two key audit matters that were most important in audit as follows: Fixed Networks goodwill valuation and revenue recognition. It set materiality at €170 million.

Therefore, readers to its accounts must pay special attention to material misstatement risk of goodwill and revenue and related items such as contract asset, contract liability, deferred tax,etc.

Profit before tax for year 2020 was €743 million, but income tax was €3.3 billion making profit after tax from continuing operations at loss of  €2.5 billion. While in 2019, profit before tax €156 million was eaten by income tax €138 million, in 2018 income tax 189 million add loss before tax 360 million to arrive at loss after tax from continuing operations 549 million.

According to the footnote, larger part of income tax was 3 billion of deferred tax in 2020. Movement of intangible assets and property, plant and equipment gave rise to most change of deferred tax assets 2.2 billion. Movement in tax losses carried forward and unused tax credits gave rise to 581 million. But it was explained that it was not probable that it would be able to utilize the unused tax losses, unused tax credits and deductible temporary differences in Finland in the foreseeable future. This assessment was done primarily based on the historical performance without mentioning the impact of covid19 or other elements. It didn't disclose the detail of temporary differences change from intangible assets and property, plant and equipment.

The change in deferred tax assets may be due to a kind of accounting estimate or material misstatement. If it were misstatement, Nokia should restate income taxes in 2019, 2018 and earlier periods rather than reflecting all the change in 2020. Usually significant adjustment of assets either due to impairment or deferred taxes may be partly due to material misstatement in the prior periods. Auditor should review the judgement and accounting estimate made in the prior periods.

The management was possibly trying to make use of covid19 and material uncertainty in judgement required in measuring deferred tax to manipulate profit.

Net sales in Finland didn't reduce significantly from 2018 to 2020 while net sales in China and India decreased consecutively for two years by more than overall 40%.

International Accounting Standard 1 Presentation of Financial Statements required that Nokia to present information in a manner that provides understandable information and to provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of change in judgement on deferred tax assets on the entity’s financial position and financial performance.

I don't know whether the auditor failed to pay special attention to deferred tax assets and require auditee to make corresponding adjustment or given qualified audit opinion, given that the largest change in balance sheet arose from the item. Due to the inherent uncertainty, auditor should at least add emphasis matter paragraph to the auditor's report.