Microsoft 2009 Annual Report Download - page 44

PAGE 44
NOTES TO FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
The financial statements and accompanying notes are prepared in accordance with accounting principles generally
accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany
transactions and balances have been eliminated. Equity investments in which we exercise significant influence but
do not control and are not the primary beneficiary are accounted for using the equity method. Investments in which
we are not able to exercise significant influence over the investee and which do not have readily determinable fair
values are accounted for under the cost method.
ESTIMATES AND ASSUMPTIONS
Preparing financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Examples include estimates of loss contingencies, product
warranties, product life cycles, product returns, and stock-based compensation forfeiture rates; assumptions such as
the elements comprising a software arrangement, including the distinction between upgrades/enhancements and
new products; when technological feasibility is achieved for our products; the potential outcome of future tax
consequences of events that have been recognized in our financial statements or tax returns; estimating the fair
value and/or goodwill impairment for our reporting units; and determining when investment impairments are other-
than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date.
Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation
adjustments resulting from this process are recorded to Other Comprehensive Income (“OCI”).
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. Prior period amounts have been
recast to conform to the current period presentation. See Note 3 – Other Income (Expense).
REVENUE RECOGNITION
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable, and collectibility is probable. We enter into certain arrangements where we are obligated to deliver
multiple products and/or services (multiple elements). In these arrangements, we generally allocate the total revenue
among the elements based on the sales price of each element when sold separately (vendor-specific objective
evidence).
Revenue for retail packaged products, products licensed to original equipment manufacturers (“OEMs”), and
perpetual licenses for current products under our Open and Select volume licensing programs generally is
recognized as products are shipped. A portion of the revenue related to Windows XP is recorded as unearned due to
undelivered elements including, in some cases, free post-delivery telephone support and the right to receive
unspecified upgrades/enhancements of Microsoft Internet Explorer on a when-and-if-available basis. The amount of
revenue allocated to undelivered elements is based on the vendor-specific objective evidence of fair value for those
elements using the residual method or relative fair value method. Unearned revenue due to undelivered elements is
recognized ratably on a straight-line basis over the related products’ life cycles. Revenue related to Windows Vista is
not subject to a similar deferral because there are no significant undelivered elements. However, Windows Vista
revenue is subject to deferral as a result of the Windows 7 Upgrade Option program which started June 26, 2009.
The program allows customers who purchase PCs from participating computer makers or retailers with certain
versions of Windows Vista to receive an upgrade to the corresponding version of Windows 7 at minimal or no cost.