Microsoft 2010 Annual Report Download - page 45

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of accounting) be used for all business combinations, but requires a number of changes, including changes in the
way assets and liabilities are recognized and measured as a result of business combinations. It also requires the
capitalization of in-process research and development at fair value and requires the expensing of acquisition-related
costs as incurred. We have applied this guidance to business combinations completed since July 1, 2009.
On July 1, 2009, we adopted guidance issued by the FASB that changes the accounting and reporting for non-
controlling interests. Non-controlling interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a change in control are to be accounted for as
equity transactions. In addition, net income attributable to a non-controlling interest is to be included in net income
and, upon a loss of control, the interest sold, as well as any interest retained, is to be recorded at fair value with any
gain or loss recognized in net income. Adoption of the new guidance did not have a material impact on our financial
statements.
On July 1, 2009, we adopted guidance on fair value measurement for nonfinancial assets and liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
Adoption of the new guidance did not have a material impact on our financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued guidance on revenue recognition that will become effective for us beginning
July 1, 2010. Under the new guidance on arrangements that include software elements, tangible products that have
software components that are essential to the functionality of the tangible product will no longer be within the scope
of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant
revenue recognition guidance. Additionally, the FASB issued guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined,
a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure requirements on how the application of
the relative selling price method affects the timing and amount of revenue recognition. We believe adoption of this
new guidance will not have a material impact on our financial statements.
In June 2009, the FASB issued guidance on the consolidation of variable interest entities, which is effective for us
beginning July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest
entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We
believe adoption of this new guidance will not have a material impact on our financial statements.
NOTE 2 — EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed based on the weighted average number of
shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the
treasury stock method. Dilutive potential common shares include outstanding stock options, stock awards, and
shared performance stock awards. The components of basic and diluted earnings per share are as follows:
(In millions, except earnings per share)
Y
ear Ended June 30, 2010
2009 2008
Net income available for common shareholders (A) $ 18,760
$ 14,569 $ 17,681
Weighted average outstanding shares of common stock (B) 8,813
8,945 9,328
Dilutive effect of stock-based awards 114
51 142
Common stock and common stock equivalents (C) 8,927
8,996 9,470
Earnings Per Share
Basic (A/B) $2.13
$ 1.63 $1.90
Diluted (A/C) $2.10
$ 1.62 $1.87
For fiscal years 2010, 2009, and 2008, 28 million, 342 million, and 91 million shares, respectively, were attributable to
outstanding stock-based awards and were excluded from the calculation of diluted earnings per share because their
inclusion would have been anti-dilutive.