Microsoft 2009 Annual Report Download - page 66

PAGE 66
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property
infringement made by third parties arising from the use of our products and certain other matters. We evaluate estimated
losses for these indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by FIN No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. To date, we have not encountered significant costs as a result of these
obligations and have not accrued any liabilities related to these indemnifications in our financial statements.
PRODUCT WARRANTY
The changes in our aggregate product warranty liabilities, which are included in other current liabilities and other
long term-liabilities on our balance sheets, were as follows:
(In millions)
Y
ear Ended June 30, 2009 2008
Balance, beginning of year $ 692 $850
Accruals for warranties issued 161 365
Adjustments to pre-existing warranties – 36
Settlements of warranty claims (511) (559)
Balance, end of year $ 342 $692
NOTE 17 CONTINGENCIES
GOVERNMENT COMPETITION LAW MATTERS
In March 2004, the European Commission issued a competition law decision that, among other things, ordered us to
license certain Windows server protocol technology to our competitors. In March 2007, the European Commission
issued a statement of objections claiming that the pricing terms we proposed for licensing the technology as required
by the March 2004 decision were “not reasonable.” Following additional steps we took to address these concerns,
the Commission announced on October 22, 2007 that we were in compliance with the March 2004 decision and that
no further penalty should accrue after that date. On February 27, 2008, the Commission issued a fine of $1.4 billion
(€899 million) relating to the period prior to October 22, 2007. In May 2008, we filed an application with the European
Court of First Instance to annul the February 2008 fine. We paid the $1.4 billion (€899 million) fine in June 2008.
In January 2008, the Commission opened a competition law investigation relating to the inclusion of various
capabilities in our Windows operating system software, including Web browsing software. The investigation was
precipitated by a complaint filed with the Commission by Opera Software ASA, a firm that offers Web browsing
software. On January 15, 2009, the European Commission issued a statement of objections expressing the
Commission’s preliminary view that the inclusion of Internet Explorer in Windows since 1996 has violated European
competition law. According to the statement of objections, other browsers are foreclosed from competing because
Windows includes Internet Explorer. We filed our written response to the statement of objections in late April 2009.
The European Commission will not make a final determination until after it assesses our response and considers
submissions from others, a process that is now underway. The statement of objections seeks to impose a remedy
that is different than the remedy imposed in the earlier proceeding concerning Windows Media Player. While
computer users and OEMs are already free to run any Web browsing software on Windows, the Commission is
considering ordering other changes to further promote the prospects of competing browser software. This may
include ordering creation of a “ballot screen” from which computer users could choose from among a variety of
browsers. The statement of objections also seeks to impose a significant fine based on worldwide sales of Windows
operating systems. In January 2008, the Commission opened an additional competition law investigation that relates
primarily to interoperability with respect to our Microsoft Office family of products. This investigation resulted from
complaints filed with the Commission by a trade association of Microsoft’s competitors. On July 24, 2009 we
submitted a proposal to the Commission to resolve the investigation concerning Internet Explorer. Under this
proposal, European consumers who use Internet Explorer as their default browser would be shown a “ballot screen”
from which they could, if they wished, easily install competing browsers from the Web. We also submitted a proposal
regarding means of promoting greater interoperability between non-Microsoft products and our Windows and Office
families of products. We made this proposal following extensive discussions with the Commission. In a statement
issued on July 24, 2009, the Commission stated it welcomes our proposals. We understand the Commission will
now consider them, which will likely entail seeking input from a range of industry participants.