Microsoft 2006 Annual Report Download - page 34

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agreements, we paid a $200 million fee to effectively terminate IJV’s prior content license agreement and we also prepaid the
remaining $14 million license fee to NBC. In the fourth quarter of fiscal year 2006, NBC exercised its option to buy our
remaining 18% interest in CJV. For fiscal year 2006, we recognized a net gain of $195 million related to the above transactions.
Income Taxes
Our effective tax rate for fiscal year 2006 was 31% as compared to 26% for fiscal year 2005. During fiscal year 2006, we
recorded a tax benefit of $108 million from the resolution of state audits. The increased rate in fiscal year 2006 resulted
primarily from the European Commission fine of €281 million ($351 million) which is not tax deductible, and a lower rate in
fiscal year 2005 as a result of reversal of $776 million of previously accrued taxes upon settling an Internal Revenue Service
examination for fiscal year 1997 – 1999 and a tax benefit of $179 million generated by the decision to repatriate foreign
subsidiary earnings under a temporary incentive provided by the American Jobs Creation Act of 2004. Our effective tax rate for
fiscal year 2004 was 33%.
Financial Condition
Cash and equivalents and short-term investments totaled $34.16 billion and $37.75 billion as of June 30, 2006, and 2005,
respectively. This investment portfolio consists primarily of fixed-income securities, diversified among industries and individual
issuers. Our investments are generally liquid and investment grade. The portfolio is invested predominantly in U.S.-dollar-
denominated securities, but also includes foreign currency positions in order to diversify financial risk. The portfolio is primarily
invested in short-term securities to facilitate rapid deployment for immediate cash needs. Equity and other investments were
$9.23 billion and $11.00 billion as of June 30, 2006, and 2005, respectively. As a result of the special dividend paid in the
second quarter of fiscal year 2005 and shares repurchased, our retained deficit, including accumulated other comprehensive
income, was $18.90 billion at June 30, 2006. Our retained deficit is not expected to impact our future ability to operate or pay
dividends given our continuing profitability and strong cash and financial position.
Unearned Revenue
Unearned revenue from volume licensing programs represents customer billings, paid either upfront or annually at the
beginning of each billing coverage period, that are accounted for as subscriptions with revenue recognized ratably over the
billing coverage period. For certain other licensing arrangements revenue attributable to undelivered elements, including free
post-delivery telephone support and the right to receive unspecified upgrades/enhancements of Microsoft Internet Explorer on a
when-and-if-available basis, is based on the sales price of those elements when sold separately and is recognized ratably on a
straight-line basis over the life cycle of the related product. Other unearned revenue includes services, TV Platform, Microsoft
Business Solutions, advertising, and subscriptions for which we have been paid upfront and earn the revenue when we provide
the service or software or otherwise meet the revenue recognition criteria.
Unearned revenue as of June 30, 2006, increased $1.74 billion from June 30, 2005, reflecting additions to unearned
revenue from multi-year licensing that outpaced recognitions by $1.66 billion, a $53 million decrease in revenue deferred for
undelivered elements, and a $127 million increase primarily in unearned revenue for services and subscription services.
The following table outlines the expected recognition of $10.9 billion of unearned revenue as of June 30, 2006:
(In millions)
Recognition
of
Unearned Revenue
Three months ended:
September 30, 2006 $3,483
December 31, 2006
2,687
March 31, 2007
1,899
June 30, 2007
1,069
Thereafter
1,764
Unearned revenue $10,902