Microsoft 2003 Annual Report Download - page 38

Part II, Item 8
MSFT 2003 FORM 10-K
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Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the account receivable balance. We determine the allowance based
on known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts is as follows:
(In millions)
Year Ended June 30 Balance at
beginning of period Charged to costs and expenses Write-offs and other Balance at end of period
2001 $ 186 $ 157 $ 169 $ 174
2002 174 192 157 209
2003 209 118 85 242
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 three years or less.
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 one to ten years. We periodically evaluate the
recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that an impairment
exists. All of our intangible assets are subject to amortization.
Employee Stock Plans
We follow Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, to account for stock option and employee stock purchase plans,
which generally does not require income statement recognition of options granted at the market price on the date of issuance. However, certain events, such as
the accelerated vesting of options and the exchange of options in a business combination, can trigger recording an expense. In addition to announcing changes to
our employee compensation arrangements in July 2003, we also indicated that we will adopt the fair value recognition provisions of SFAS 123, Accounting for
Stock-Based Compensation, effective July 1, 2003 and will report that change in accounting principle using the retroactive restatement method described in SFAS
148, Accounting for Stock-Based Compensation – Transition and Disclosure.
The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of SFAS 123:
(In millions, except earnings per share)
Y
ear Ended June 30 2001 2002 2003
Net income, as reported $ 7,346 $ 7,829 $9,993
A
dd: Stock-based employee compensation expense included in reported net income, net of tax 144 99 52
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (2,406) (2,573) (2,514)
Pro forma net income $ 5,084 $ 5,355 $7,531
Earnings per share:
Basic – as reported $ 0.69 $ 0.72 $ 0.93
Basic – pro forma $ 0.48 $ 0.50 $ 0.70
Diluted – as reported $ 0.66 $ 0.70 $ 0.92
Diluted – pro forma $ 0.46 $ 0.48 $ 0.69
Note 2—Stock Split
In February 2003, outstanding shares of our common stock were split two-for-one. All prior share and per share amounts have been restated to reflect the stock
split.
Note 3—Accounting Changes
Effective July 1, 2000, we adopted SFAS 133 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