Microsoft 2007 Annual Report Download - page 41

PAGE 40
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Announced” forward purchase commitments of mortgage-backed assets are also considered derivatives in cases
where physical delivery of the assets in 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 year
Chargedtocosts
and expenses
Write-offs
and other
Balance at
end of yea
r
2005 166 48 (43) $171
2006 171 40 (69) 142
2007 142 64 (89) $117
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. We regularly review
inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our
inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost
basis.
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
Goodwill is tested for impairment on an annual basis as of July 1, and between annual tests if indicators of
potential impairment exist, using a fair-value-based approach. No impairment of goodwill has been identified
during any of the periods presented.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from
one to ten years. We evaluate the recoverability of intangible assets periodically and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our
intangible assets are subject to amortization. No material impairments of intangible assets have been identified
during any of the periods presented.
PRODUCT WARRANTY
We provide for the estimated costs of hardware and software warranties at the time the related revenue is
recognized. For hardware warranty, we estimate the costs based on historical and projected product failure rates,
historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware
warranty terms and conditions vary depending upon the product sold and country in which we do business, but
generally include technical support, parts, and labor over a period generally ranging from 90 days to three years.
For software, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the
software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and
adjust the amounts as necessary.