Microsoft 2005 Annual Report Download - page 20

PAGE 19
We have claims and lawsuits against us that may result in adverse outcomes. We are subject to a variety of claims and
lawsuits. Adverse outcomes in some or all of the claims pending against us may result in significant monetary damages or
injunctive relief against us that could adversely affect our ability to conduct our business. While management currently believes
that resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our financial
position or results of operations, the litigation and other claims noted above are subject to inherent uncertainties and
management’s view of these matters may change in the future. There exists the possibility of a material adverse impact on our
financial position and the results of operations for the period in which the effect of an unfavorable final outcome becomes
probable and reasonably estimable.
We may have additional tax liabilities. We are subject to income taxes in both the United States and numerous foreign
jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of
our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly
under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and
any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals.
Based on the results of an audit or litigation, a material effect on our income tax provision, net income, or cash flows in the
period or periods for which that determination is made could result.
We may be at risk of having insufficient supplies of certain Xbox 360 components or console inventory. Some components of
the upcoming Xbox 360 are obtained from a single supplier and others may be subject to an industry- wide supply shortage. If a
component delivery from a sole-source supplier is delayed or becomes unavailable or industry shortages occur, we may be
unable to obtain replacement supplies on a timely basis resulting in reduced console and game sales. Components are ordered
based on forecasted console demand so we may experience component shortages for the Xbox 360. Similarly, if our demand
forecasts for the existing Xbox console are inaccurate and exceed actual demand, we may have excess console inventory that
may require us to record charges to cost of revenue for the excess inventory. Xbox 360 consoles will be assembled in Asia;
disruptions in the supply chain may result in console shortages that would affect our revenues and operating margins.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to
earnings. Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when
events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for
impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of
our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization,
future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our
financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined
resulting in an impact on our results of operations.
Changes in accounting may affect our reported earnings and operating income. Generally accepted accounting principles and
accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of our business,
such as revenue recognition for software, accounting for financial instruments, and treatment of goodwill or amortizable
intangible assets, are highly complex and involve subjective judgments. Changes in these rules, their interpretation, or changes
in our products or business could significantly change our reported earnings and operating income and could add significant
volatility to those measures, without a comparable underlying change in cash flow from operations. See Note 1 in “Notes to
Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical
Accounting Policies” of this report.
We operate a global business that exposes us to additional risks. We operate in over 100 countries and a significant part of
our revenue comes from international sales. Pressure to make our pricing structure uniform might require that we reduce the
sales price of our software in the United States and other countries. Operations outside of the United States may be affected by
changes in trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment;
unexpected changes in regulatory requirements for software; social, political, labor, or economic conditions in a specific country
or region; and difficulties in staffing and managing foreign operations. While we hedge a portion of our international currency
exposure, significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our
future net revenues.