Microsoft 2009 Annual Report Download - page 45

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PAGE 45
In addition, purchasers of retail packaged Windows Vista may also qualify for a free or discounted upgrade to the
equivalent Windows 7 product with participating retailers in participating markets when the product becomes
generally available. Accordingly, estimated revenue related to the undelivered Windows 7 product is deferred until
the product is delivered.
Revenue from multi-year licensing arrangements are accounted for as subscriptions, with billings recorded as
unearned revenue and recognized as revenue ratably over the billing coverage period. Certain multi-year licensing
arrangements include rights to receive future versions of software product on a when-and-if-available basis under
Open and Select volume licensing programs (software assurance). In addition, other multi-year licensing
arrangements include a perpetual license for current products combined with rights to receive future versions of
software products on a when-and-if-available basis under Open, Select, and Enterprise Agreement volume licensing
programs. Premier support services agreements, MSN Internet Access subscriptions, Xbox Live, and Microsoft
Developer Network subscriptions are also accounted for as subscriptions.
Revenue related to our Xbox 360 game console, games published by us, and other hardware components is
generally recognized when ownership is transferred to the retailers. Revenue related to games published by third
parties for use on the Xbox 360 platform is recognized when games are manufactured by the game publishers.
Display advertising revenue is recognized as advertisements are displayed. Search advertising revenue is
recognized when the ad appears in the search results or when the action necessary to earn the revenue has been
completed. Consulting services revenue is recognized as services are rendered, generally based on the negotiated
hourly rate in the consulting arrangement and the number of hours worked during the period. Consulting revenue for
fixed-price services arrangements is recognized as services are provided.
Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to
governmental authorities.
COST OF REVENUE
Cost of revenue includes manufacturing and distribution costs for products sold and programs licensed, operating
costs related to product support service centers and product distribution centers, costs incurred to drive traffic to our
website and/or acquire online advertising space (“traffic acquisitions costs”), costs incurred to support and maintain
Internet-based products and services, warranty costs, inventory valuation adjustments, costs associated with the
delivery of consulting services, and the amortization of capitalized research and development costs associated with
software products that have reached technological feasibility. Capitalized research and development costs are
amortized over the estimated lives of the products.
PRODUCT WARRANTY
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time
the related revenue is recognized. For hardware warranties, 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 the 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 warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of
the software.
RESEARCH AND DEVELOPMENT
Research and development expenses include payroll, employee benefits, stock-based compensation, and other
headcount-related expenses associated with product development. Research and development expenses also
include third-party development and programming costs, localization costs incurred to translate software for
international markets, the amortization of purchased software code and services content, and in-process research
and development. Such costs related to software development are included in research and development expense
until the point that technological feasibility is reached, which for our software products, is generally shortly before the
products are released to manufacturing. Once technological feasibility is reached, such costs are capitalized and
amortized to cost of revenue over the estimated lives of the products.