Microsoft 2007 Annual Report Download - page 58

PAGE 57
resellers fail to collect from the end user. Due to the nature of the indemnification provided to our resellers, we
cannot estimate the fair value, nor determine the total nominal amount of the indemnification. We evaluate
estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by
FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees
of Indebtedness of Others. We consider such factors as the degree of probability of an unfavorable outcome and
the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs
as a result of such obligations and have not accrued any liabilities related to such indemnifications in our financial
statements. 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 warranty, 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.
In July 2007, we expanded our global Xbox 360 warranty coverage to three years from the date of purchase for
a general hardware failure indicated by three flashing red lights. The basic Xbox 360 console warranty remains in
place with a warranty period of one year from the date of purchase in most geographies.
The changes in our aggregate product warranty liabilities, which are included in other current liabilities and
other long term-liabilities on our balance sheets, were as follows:
(In millions) Amount
Balance at July 1, 2005 $ 14
Accruals for warranties issued 45
Adjustments to pre-existing warranties (7)
Settlements of warranty claims (42)
Balance at June 30, 2006 10
Accruals for warranties issued(1) 974
Adjustments to pre-existing warranties 92
Settlements of warranty claims (226)
Balance at June 30, 2007 $850
(1) Includes warranty expense incurred as a result of the expansion of our Xbox 360 warranty coverage as
discussed above.
NOTE 17 CONTINGENCIES
Government competition law matters. In March 2004, the European Commission issued a decision in its
competition law investigation of us. The Commission concluded that we infringed European competition law by
refusing to license to our competitors certain protocol technology in the Windows server operating systems and by
including streaming media playback features in Windows desktop operating systems. The Commission ordered
us to license the protocol technology to our competitors and to develop and make available a version of the
Windows desktop operating system that does not include specified media playback software. The Commission
also fined us €497 million ($605 million). We appealed the decision to the Court of First Instance. In July 2006, the
European Commission determined that we had not complied with the technical documentation requirements of
the 2004 Decision, and fined us €281 million ($351 million). We have appealed this fine to the Court of First
Instance. We have expensed and paid both fines, pending resolution of the appeals. In March 2007, the
European Commission announced a new statement of objections. The new statement of objections claims that
the pricing terms we proposed for licensing certain server protocol technology as required by the March 2004
decision are “not reasonable.” The statement of objections threatens to impose new fines of up to €500,000