Microsoft 2008 Annual Report Download - page 55

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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets
and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are
actually paid or recovered.
We have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of
approximately $7.5 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently
reinvested outside the United States. The amount of unrecognized deferred tax liability associated with these
temporary differences is approximately $2.2 billion.
Income taxes paid were $5.4 billion in fiscal year 2008, $5.2 billion in fiscal year 2007, and $4.8 billion in fiscal
year 2006.
FIN 48
On July 1, 2007, we adopted the provisions of FIN 48 which had the following impact on our financial statements:
increased current assets by $228 million, long-term assets by $1.1 billion, long-term liabilities by $2.1 billion, and
retained deficit by $395 million; and decreased income taxes payable by $394 million. As of June 30, 2008, we
had $3.2 billion of unrecognized tax benefits of which $2.3 billion, if recognized, would affect our effective tax rate.
As of July 1, 2007, we had $7.1 billion of unrecognized tax benefits of which $5.3 billion, if recognized, would
affect our effective tax rate. Our policy is to include interest and penalties related to unrecognized tax benefits in
income tax expense. Interest totaled $121 million in fiscal year 2008. As of June 30, 2008 and July 1, 2007, we
had accrued interest related to uncertain tax positions of $324 million and $863 million, respectively, net of federal
income tax benefits, on our balance sheets.
The aggregate changes in the balance of unrecognized tax benefits were as follows:
(In millions)
Y
ear Ended June 30, 2008
Balance, beginning of year $7,076
Decreases related to settlements 4,787)
Increases for tax positions related to the current year 934
Increases for tax positions related to prior years 66
Decreases for tax positions related to prior years (80)
Reductions due to lapsed statute of limitations (14)
Balance, end of year $3,195
During fiscal year 2008, we reached a settlement with the Internal Revenue Service (“IRS”) on its 2000-2003
examination. As a result, we reduced our unrecognized tax benefits by $4.8 billion and recognized a tax provision
reduction of $1.2 billion. We are under audit by the IRS for the tax years 2004-2006. We do not believe it is
reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease
within the next 12 months as we do not believe the examination will be concluded within the next 12 months. As a
result of our settlement related to the 2000-2003 examination, we paid the IRS approximately $3.1 billion during
the first quarter of fiscal year 2009.
We are subject to income tax in many jurisdictions outside the United States, none of which are individually
material to our financial position, cash flows, or results of operations.
NOTE 12 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.