Microsoft 2009 Annual Report Download - page 37

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PAGE 37
Income Taxes
SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect
of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that
have been recognized in an entity’s financial statements or tax returns. Accruals for uncertain tax positions are
provided for in accordance with the requirements of FIN No. 48, Accounting for Uncertainty in Income Taxes – An
interpretation of FASB Statement No. 109. Under FIN No. 48, we 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 of income tax assets
and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual
outcome of these future tax consequences could materially impact our financial position, results of operations, or
cash flows.
Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Under the
fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense over the requisite service period. Determining the
fair value of stock-based awards at the grant date requires judgment, including estimating expected dividends. In
addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited.
If actual results differ significantly from these estimates, stock-based compensation expense and our results of
operations could be impacted.
Product Warranties
We account for product warranties in accordance with SFAS No. 5, Accounting for Contingencies. 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 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 life of the software. We regularly reevaluate our estimates to assess
the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.