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MSFT 40 / 2002 FORM 10-K
Part II
Item 8
INVENTORIES
Inventories are stated at the lower of cost or market, using the average cost method. Cost includes materials, labor, and manufacturing overhead related to
the purchase and production of inventories.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated life of the asset or the lease term,
ranging from one to 15 years. Computer software developed or obtained for internal use is depreciated using the straight-line method over the estimated
useful life of the software, generally not in excess of three years.
GOODWILL
Beginning in fiscal 2002 with the adoption of SFAS 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized, but instead tested for
impairment at least annually. Prior to fiscal 2002, goodwill was amortized using the straight-line method over its estimated period of benefit.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from three to seven years. The Company
periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or
that indicate that an impairment exists. All of Microsoft’s intangible assets are subject to amortization.
RECLASSIFICATIONS
Certain reclassifications have been made for consistent presentation.
NOTE 2 ACCOUNTING CHANGES
Effective July 1, 2000, the Company adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption
of SFAS 133 on July 1, 2000, resulted in a cumulative pre-tax reduction to income of $560 million ($375 million after-tax) and a cumulative pre-tax reduction
to OCI of $112 million ($75 million after-tax). The reduction to income was mostly attributable to a loss of approximately $300 million reclassified from OCI for
the time value of options and a loss of approximately $250 million reclassified from OCI for derivatives not designated as hedging instruments. The reduction
to OCI was mostly attributable to losses of approximately $670 million on cash flow hedges offset by reclassifications out of OCI of the approximately $300
million loss for the time value of options and the approximately $250 million loss for derivative instruments not designated as hedging instruments. The net
derivative losses included in OCI as of July 1, 2000 were reclassified into earnings during the twelve months ended June 30, 2001. The change in accounting
from the adoption of SFAS 133 did not materially affect net income in 2001.
Effective July 1, 2001, Microsoft adopted SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separate from goodwill. SFAS 142 requires that goodwill and certain intangibles no longer
be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill upon adoption of SFAS 142.
Net income and earnings per share for fiscal 2000 and fiscal 2001 adjusted to exclude amortization expense (net of taxes) is as follows:
In millions, except earnings per share
Y
ear Ended June 30 2000 2001
Net income:
Reported net income $9,421 $7,346
Goodwill amortization 203 252
Equity method goodwill amortization 1 26
Adjusted net income $9,625 $7,624
Basic earnings per share:
Reported basic earnings per share $1.81 $1.38
Goodwill amortization 0.04 0.05
Equity method goodwill amortization – –
Adjusted basic earnings per share $1.85 $1.43
Diluted earnings per share:
Reported diluted earnings per share $1.70 $1.32
Goodwill amortization 0.04 0.05
Equity method goodwill amortization – –
Adjusted diluted earnings per share $1.74 $1.37