Microsoft 2009 Annual Report Download - page 28

PAGE 28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other Income (Expense)
The components of other income (expense) were as follows:
(In millions, except percentages) 2009 2008 2007
Percentage
Change 2009
Versus 2008
Percentage
Change 2008
Versus 2007
Dividends and interest $ 706 $888 $1,319
Net recognized gains (losses) on investments (125) 346 650
Net gains (losses) on derivatives (558) 226 (358)
Net gains (losses) on foreign currency
remeasurements (509) 226 56
Other (56) (143 ) (4)
Total $(542) $1,543 $1,663 (135)% (7)%
Effective July 1, 2008, we began presenting gains and losses resulting from foreign currency remeasurements as a
component of other income (expense). Prior to July 1, 2008, we included gains and losses resulting from foreign
currency remeasurements as a component of sales and marketing expense. We changed our presentation because
this better reflects how we manage these foreign currency exposures, as such gains and losses arising from the
remeasurement of foreign currency transactions are incidental to our operations. For the twelve months ended
June 30, 2009, $509 million of losses were reported as other income (expense). For the twelve months ended
June 30, 2008 and 2007, $221 million and $86 million of gains, respectively, were previously recorded as a
component of sales and marketing expense and have been recast as other income (expense).
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, including market declines subsequent to the period end. If the cost of an investment exceeds its fair
value, among other factors, we evaluate general market conditions, credit quality of debt instrument issuers, the
duration and extent to which the fair value is less than cost, and for equity securities, our intent and ability to hold, or
plans to sell, the investment. For fixed income securities, we also evaluate whether we have plans to sell the security
or it is more likely than not that we will be required to sell the security before recovery. 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, and operational and financing cash flow factors. Once a decline in fair
value is determined to be other-than-temporary, an impairment charge is recorded to other income (expense) 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 risks related to foreign currencies, equity prices, interest rates, and
credit; to enhance investment returns; and to facilitate portfolio diversification. Gains and losses from changes in fair
values of derivatives that are not designated as hedges are recognized in other income (expense). These are
generally offset by unrealized gains and losses in the underlying securities in the investment portfolio and are
recorded as a component of other comprehensive income.
Fiscal year 2009 compared with fiscal year 2008
Dividends and interest income decreased primarily reflecting lower interest rates on our fixed-income investments.
Net recognized losses on investments increased primarily due to higher other-than-temporary impairments that were
partially offset by gains on sales of certain equity investments held in our strategic investments portfolio. Other-than-
temporary impairments were $862 million during the twelve months ended June 30, 2009, as compared with $312
million during the twelve months ended June 30, 2008 and increased primarily due to declines in equity values as a
result of deterioration in equity markets. Net losses on derivatives increased primarily due to losses on equity,
commodity, and interest rate derivatives in the current period as compared with gains in the prior period. Net losses
on foreign currency remeasurements increased due to the strengthening of the U.S. dollar, particularly in the first
half of the current fiscal year.