Telkom provisions for legal costs

By Dave Glazier for Telkom
Johannesburg, 23 Feb 2007

Telkom warns it is provisioning for the costs of damages in its Telcordia dispute, which will have a material effect on its financial results.

This follows a decision by nine Constitutional Court judges earlier this week, to uphold the Supreme Court of Appeal's ruling that Telkom must pay contract-dispute damages to US software firm Telcordia.

Telkom took the matter to the Constitutional Court in December, a move that goes some way to illustrating the potential damage of losing the case - possibly upwards of R1 billion.

"The arbitration process will proceed later in the year, most likely in the third quarter of 2007," says Kaushik Patel, Telkom's CFO, in a statement.

"By then, provisioning for any liability in the Telcordia issue would have been considered in terms of the International Financial Reporting standards."

Telkom also points out that it has consistently disclosed, in its financial reports, its protracted dispute with Telcordia as a contingent liability since 2004.

"Telkom's dispute with Telcordia Technologies arose in 2001 and a partial ruling was issued by the arbitrator in favour of Telcordia a year later. This constituted a liability to the company and Telkom provisioned a total amount of $44 million (R356 million) at the time.

"This status changed from a liability to a contingent liability in 2002 following Telkom's successful appeal of the matter in the Pretoria High Court," Patel adds.

However, Telkom continued to disclose the dispute as a contingent liability in its financial reports since 2004 as Telcordia still had the right to appeal, which the US company later did, and won.

"In view of the Constitutional Court's decision yesterday, Telkom will have to consider a provision in this regard for the March 2007 financial statements," he notes.

However, this is dependent on the requirements of the International Financial Reporting Standards, which prescribes the liability must be probable and measurable.