Microsoft 2009 Annual Report Download - page 46

PAGE 46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SALES AND MARKETING
Sales and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-
related expenses associated with sales and marketing personnel, and the costs of advertising, promotions,
tradeshows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was
$1.4 billion, $1.2 billion, and $1.3 billion in fiscal years 2009, 2008, and 2007, respectively.
EMPLOYEE SEVERANCE
We record employee severance when a specific plan has been approved by management, the plan has been
communicated to employees, and it is unlikely that significant changes will be made to the plan.
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 applicable vesting period of the stock
award (generally four to five years) using the straight-line method.
INCOME TAXES
Income tax expense includes U.S. and international income taxes, plus the provision for U.S. taxes on undistributed
earnings of international subsidiaries not deemed to be permanently invested. Certain income and expenses are not
reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is
reported as deferred income taxes.
FINANCIAL INSTRUMENTS
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of
purchase to be cash equivalents. The fair value of these investments approximates their carrying value. In general,
investments with original maturities of greater than three months and remaining maturities of less than one year are
classified as short-term investments. Investments with maturities beyond one year may be classified as short-term
based on their highly liquid nature and because such marketable securities represent the investment of cash that is
available for current operations. All cash equivalents and short-term investments are classified as available-for-sale
and realized gains and losses are recorded using the specific identification method. Changes in market value,
excluding other-than-temporary impairments, are reflected in OCI.
Equity and other investments classified as long-term include both debt and equity instruments. Debt and publicly-
traded equity securities are classified as available-for-sale and realized gains and losses are recorded using the
specific identification method. Changes in market value, excluding other-than-temporary impairments, are reflected
in OCI. Common and preferred stock and other investments that are restricted for more than one year or are not
publicly traded are recorded at cost or using the equity method.
We lend certain fixed-income and equity securities to enhance investment income. The loaned securities continue
to be carried as investments on our balance sheet. Collateral and/or security interests received (securities pledged
as collateral) are determined based upon the underlying security lent and the creditworthiness of the borrower. Cash
collateral is recorded as an asset with a corresponding liability.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. We
employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence
in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we
evaluate, among other factors, 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.