Microsoft 2004 Annual Report Download - page 39

NOTES TO FINANCIAL STATEMENTS
PAGE 39
NOTE 1 ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
The financial statements and accompanying notes are prepared in accordance with accounting principles generally
accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Microsoft Corporation and its subsidiaries (Microsoft). Intercompany
transactions and balances have been eliminated. Equity investments in which we exercised significant influence but do
not control and are not the primary beneficiary are accounted for using the equity method. Investments in which we are
not able to exercise significant influence over the investee are accounted for under the cost method.
ESTIMATES AND ASSUMPTIONS
Preparing financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Examples include estimates of loss contingencies and product life
cycles, and assumptions such as the elements comprising a software arrangement, including the distinction between
upgrades/enhancements and new products; when technological feasibility is achieved for our products; the potential
outcome of future tax consequences of events that have been recognized in our financial statements or tax returns; and
determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from
management’s estimates and assumptions.
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date.
Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments
resulting from this process are charged or credited to other comprehensive income (OCI).
REVENUE RECOGNITION
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is probable. We enter into certain arrangements where we are obligated to deliver multiple
products and/or services (multiple elements). In these transactions, we allocate the total revenue among the elements
based on the sales price of each element when sold separately (vendor-specific objective evidence).
Revenue for retail packaged products, products licensed to original equipment manufacturers (OEMs), and perpetual
licenses for current products under our Open and Select volume licensing programs generally is recognized as products
are shipped, with a portion of the revenue recorded as unearned due to undelivered elements including, in some cases,
free post-delivery telephone support and the right to receive unspecified upgrades/enhancements of Microsoft Internet
Explorer on a when-and-if-available basis. The amount of revenue allocated to undelivered elements is based on the
vendor-specific objective evidence of fair value for those elements using the residual method. Under the residual method,
the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is recorded as
unearned, and the difference between the total arrangement fee and the amount recorded as unearned for the
undelivered elements is recognized as revenue related to delivered elements. Unearned revenue due to undelivered
elements is recognized ratably on a straight-line basis over the related product’s life cycle.
Revenue from multi-year licensing arrangements are accounted for as subscriptions, with billings recorded as
unearned revenue and recognized as revenue ratably over the billing coverage period. Certain multi-year licensing
arrangements include rights to receive future versions of software product on a when-and-if-available basis under Open
and Select volume licensing programs (currently named Software Assurance and, previously named Upgrade
Advantage). In addition, other multi-year licensing arrangements include a perpetual license for current products
combined with rights to receive future versions of software products on a when-and-if-available basis under Open, Select,
and Enterprise Agreement volume licensing programs. Premier support services agreements, MSN Internet Access
subscriptions, Xbox Live, Microsoft bCentral subscriptions, and Microsoft Developer Network subscriptions are also
accounted for as subscriptions.