Microsoft 2007 Annual Report Download - page 42

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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes –
an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. The Interpretation provides a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48,
the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position should be measured based
on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN
No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN No. 48 is effective for us beginning July 1, 2007. Based on our current
assessment, the adoption of FIN No. 48 is expected to decrease beginning retained earnings by $200 million to
$400 million upon adoption.
In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue No. 06-2,
“Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue
No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit
arrangement over the requisite service period. EITF Issue No. 06-2 is effective for us beginning July 1, 2007. The
cumulative effect of the application of this consensus on prior period results should be recognized through a
cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Elective
retrospective application is also permitted. We do not expect the application of this consensus to have a material
impact on our financial statements.
In fiscal year 2007, we adopted Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires companies to quantify
misstatements using both a balance sheet (iron curtain) and an income statement (rollover) approach to evaluate
whether either approach results in an error that is material in light of relevant quantitative and qualitative factors,
and provides for a one-time cumulative effect transition adjustment. The adoption of SAB No. 108 did not have an
impact on our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source
of the information. This statement is effective for us beginning July 1, 2008. We currently are assessing the
potential impact that adoption of SFAS No. 157 would have on our financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 gives us the irrevocable option to carry many financial assets and liabilities at fair
values, with changes in fair value recognized in earnings. SFAS No. 159 is effective for us beginning July 1, 2008,
although early adoption is permitted. We are currently assessing the potential impact that adoption of SFAS
No. 159 will have on our financial statements.
NOTE 2 UNEARNED REVENUE
Unearned revenue is comprised of the following items:
Volume licensing programs – Represents customer billings for multi-year licensing arrangements, paid either
upfront or annually at the beginning of each billing coverage period, which are accounted for as subscriptions with
revenue recognized ratably over the billing coverage period.
Undelivered elements – Represents free post-delivery telephone support and the right to receive unspecified
upgrades/enhancements of Microsoft Internet Explorer on a when-and-if-available basis. This revenue deferral is
applicable for Windows XP and previous PC operating systems shipped as retail packaged products, products
licensed to original equipment manufacturers (“OEM”), and perpetual licenses for current products under our
Open and Select volume licensing programs. The amount recorded as unearned is based on the sales price of
those elements when sold separately and is recognized ratably on a straight-line basis over the related product’s
life cycle. The percentage of revenue recorded as unearned due to undelivered elements ranges from
approximately 15% to 25% of the sales price for Windows XP Home and approximately 5% to 15% of the sales
price for Windows XP Professional, depending on the terms and conditions of the license and prices of the