Microsoft 2006 Annual Report Download - page 48

Download and view the complete annual report

Please find page 48 of the 2006 Microsoft annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 73

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73

PAGE 47
We use derivative instruments to manage exposures to foreign currency, equity price, interest rate and credit risks, to
enhance returns, and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating,
and efficiently managing the economic impact of these exposures as effectively as possible. Derivative instruments are
recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated
as a fair-value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain
on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash-flow hedge, the
effective portion of the derivative’s gain or loss is initially reported as a component of OCI and is subsequently recognized in
earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. For
options designated either as fair-value or cash-flow hedges, changes in the time value are excluded from the assessment of
hedge effectiveness and are recognized in earnings. Gains and losses from changes in fair values of derivatives that are not
designated as hedges for accounting purposes are recognized in earnings.
Foreign Currency Risk. Certain assets, liabilities, and forecasted transactions are exposed to foreign currency risk. We
monitor our foreign currency exposures daily to maximize the overall effectiveness of our foreign currency hedge positions.
Options are used to hedge a portion of forecasted international revenue for up to three years in the future and are designated
as cash-flow hedging instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for
Derivative Instruments and Hedging Activities. Principal currencies hedged include the euro, Japanese yen, British pound, and
Canadian dollar. Certain non-U.S. dollars denominated securities are hedged using foreign exchange forward contracts that are
designated as fair-value hedging instruments under SFAS No. 133. Certain options and forwards not designated as hedging
instruments under SFAS No. 133 are also used to hedge the impact of the variability in exchange rates on accounts receivable
and collections denominated in certain foreign currencies and to manage other foreign currency exposures.
Equities Price Risk. Equity investments are subject to market price risk. From time to time, we use and designate options to
hedge fair values and cash flows on certain equity securities. We determine the security, or forecasted sale thereof, selected for
hedging by evaluating market conditions, up-front costs, and other relevant factors. Certain options, futures and swap contracts,
not designated as hedging instruments under SFAS No. 133, are also used to manage equity exposures.
Interest Rate Risk. Fixed-income securities are subject to interest rate risk. The fixed-income portfolio is diversified and
consists primarily of investment grade securities to minimize credit risk. We use exchange-traded option and future contracts
and over-the-counter swap contracts, not designated as hedging instruments under SFAS No. 133, to hedge interest rate risk.
Other Derivatives. Swap contracts, not designated as hedging instruments under SFAS No. 133, are used to manage
exposures to credit risks, enhance returns, and to facilitate portfolio diversification. In addition, we may invest in warrants to
purchase securities of other companies as a strategic investment. Warrants that can be net share settled are deemed derivative
financial instruments and are not designated as hedging instruments. “To Be Announced” forward purchase commitments of
mortgage-backed assets are also considered derivatives in cases where physical delivery of the assets are not taken at the
earliest available delivery date. All derivative instruments not designated as hedging instruments are recorded at fair value, with
changes in value recognized in earnings during the period of change.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts 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 was 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
2004 $242
$44
$(120)
$166
2005
166
48
(43)
171
2006
17
1
40
(69)
142