Microsoft 2008 Annual Report Download - page 26

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Investment Income and Other
The components of investment income and other were as follows:
(In millions) 2008 2007 2006
Percentage
Change 2008
versus 2007
Percentage
Change 2007
versus 2006
Dividends and interest $888 $1,319 $1,510 (33)% (13)%
Net recognized gains on investments 346 650 161 (47)% 304%
Net gains (losses) on derivatives 226 (358) (99) * 262%
Other (138) (34) 218 306% *
Investment income and other $1,322 $1,577 $1,790 (16)% (12)%
* Not meaningful
Fiscal year 2008 compared with fiscal year 2007
Dividends and interest income decreased reflecting lower interest rates on our fixed-income investments and a
reduction in the average balance of interest-bearing investments owned. Net recognized gains on investments,
which include other-than-temporary impairments of $312 million during fiscal year 2008 and $25 million during
fiscal year 2007, decreased primarily due to declines in equity values as a result of the recent stock market
decline. Net gains on derivatives increased primarily due to higher net gains on equity, commodity, and interest
rate derivatives. Other of $138 million includes the correction of several immaterial items from prior periods.
Fiscal year 2007 compared with fiscal year 2006
Dividends and interest income declined reflecting a decline in the average balance of dividend and interest-
bearing investments owned, partly offset by higher interest rates received on our fixed-income investments. Net
recognized gains on investments, which include other-than-temporary impairments of $25 million during fiscal
year 2007 and $408 million in fiscal year 2006, increased primarily due to lower other-than-temporary
impairments and gains on sales of fixed-income investments as compared to losses in fiscal year 2006, partly
offset by fewer gains on the sale of equity investments. Derivative losses were primarily driven by net losses in
time value on foreign currency contracts used to hedge anticipated foreign currency revenues. Other in fiscal year
2006 includes $195 million of gains that resulted from the restructuring of joint venture relationships between
Microsoft and NBC related to MSNBC Cable L.L.C. and MSNBC Interactive News, L.L.C.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary.
We employ a systematic methodology that considers available evidence in evaluating potential impairment of our
investments. If the cost of an investment exceeds its fair value, among other factors, we evaluate general market
conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the
investment. We also consider specific adverse conditions related to the financial health of and business outlook
for the investee, including industry and sector performance, changes in technology, operational and financing
cash flow factors, and rating agency actions. Once a decline in fair value is determined to be other-than-
temporary, an impairment charge is recorded and a new cost basis in the investment is established.
We lend certain fixed-income and equity securities to increase investment returns. The loaned securities
continue to be carried as investments on our balance sheet. Collateral and/or security interest is determined
based upon the underlying security and the creditworthiness of the borrower. Cash collateral is recorded as an
asset with a corresponding liability.
We use derivative instruments to manage exposures to interest rates, equity prices, and foreign currency
markets and to facilitate portfolio diversification. Gains and losses arising from derivatives not designated as
accounting hedges are in large part economically offset by unrealized losses and gains, respectively, in the
underlying securities which are recorded as a component of other comprehensive income.