Microsoft to write off billions of dollars in Nokia assets

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According to news on July 1, Microsoft may announce the write-off of a large part of Nokia's assets as early as Wednesday. This sign was shown as early as the end of April, when Microsoft warned investors that the smartphone division was at "high risk of impairment."

The term impairment is used to describe situations where the market value of a business is less than its book value. In such cases, the company is required to take a non-cash charge to cover the difference. "A decrease in future cash flows used to estimate the fair value of the Phone Hardware reporting unit, a decrease in future sales growth rates, or an increase in the risk-adjusted discount rate could result in an impairment adjustment that could have a material impact on earnings," Microsoft said in an April 23 filing with the Securities and Exchange Commission.

The Nokia acquisition was one of the last moves of former Microsoft CEO Steve Ballmer, who resigned in February 2014. Analysts saw the move as necessary for Microsoft to compete in the mobile industry, but it would not improve Microsoft's fortunes in the smartphone market. Current CEO Satya Nadella is thought to be against the acquisition. The last time Microsoft wrote off an acquisition was in mid-2012, when the company took a $6.2 billion charge related to its acquisition of aQuantive five years earlier. Microsoft spent $6.3 billion to acquire online marketing company aQuantive.

Ironically, Microsoft exited the online advertising market on Monday, signing an agency agreement with AOL, retaining only Bing search ads. AOL will assume Microsoft's display, mobile and video advertising sales in the United States and eight other markets, including the United Kingdom, Canada, Germany and Japan. About 1,200 people from Microsoft's advertising department will move to AOL. In return, AOL will set Bing as the default search engine on its own website. The write-off of Nokia assets may be announced as early as Wednesday in a filing with the SEC, as Wednesday is the first working day of Microsoft's new fiscal year (ending June 30 each year).

It is unclear how many assets Microsoft will write off, as the company has some flexibility in such actions. Writing off Nokia assets also fits in with Nadella's warning last week that Microsoft faces "tough choices." "We need to innovate in new areas, execute on our plans, make tough choices in areas where things are not going well, and solve difficult problems in ways that drive customer value," he said in an email to all employees.

Few analysts believe Microsoft will actually shut down its smartphone division or exit the phone-making business, largely because it has poured resources into developing Windows 10 for a wide range of devices and encouraging developers to create "universal" apps and port Android and iOS apps to Windows 10 Mobile.