Microsoft 2009 Annual Report Download - page 47

PAGE 47
Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The
accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the
resulting designation. See Note 5 – Derivatives.
Our current financial liabilities, including our short-term debt, have fair values that approximate their carrying
values. Our long-term financial liabilities consist of long-term debt which is recorded on the balance sheet at
issuance price less unamortized discount.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable
balance. We determine the allowance based on known troubled accounts, historical experience, and other currently
available evidence. Activity in the allowance for doubtful accounts was as follows:
(In millions) 2009
2008 2007
Y
ear Ended June 30,
Balance, beginning of period $ 153
$117 $142
Charged to costs and other 360
88 64
Write-offs (62 )
(52) (89 )
Balance, end of period $ 451
$153 $117
INVENTORIES
Inventories are stated at the lower of cost or market, using the average cost method. Cost includes materials, labor,
and manufacturing overhead related to the purchase and production of inventories. We regularly review inventory
quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our
review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a
charge to cost of revenue.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the
estimated life of the asset or the lease term, ranging from one to 15 years. Computer software developed or
obtained for internal use is depreciated using the straight-line method over the estimated useful life of the software,
generally three years.
GOODWILL
Goodwill is tested for impairment on an annual basis and between annual tests if indicators of potential impairment
exist, using a fair-value-based approach. During the second quarter of fiscal year 2009, we changed the date of our
annual impairment test from July 1 to May 1. The change was made to more closely align the impairment testing
date with our long-range planning and forecasting process. We believe the change in our annual impairment testing
date did not delay, accelerate, or avoid an impairment charge. We have determined that this change in accounting
principle is preferable under the circumstances and does not result in adjustments to our financial statements when
applied retrospectively. See Note 10 – Goodwill.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from
one to 10 years. We evaluate the recoverability of intangible assets periodically by taking into account events or
circumstances that may warrant revised estimates of useful lives or that may indicate the asset may be impaired. All
of our intangible assets are subject to amortization. No material impairments of intangible assets have been
identified during any of the periods presented.