Microsoft 2012 Annual Report Download - page 45

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NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ACCOUNTING POLICIES
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
Principles of Consolidation
The financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions
and balances have been eliminated. Equity investments through which we exercise significant influence over but do not
control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity
method. Investments through which we are not able to exercise significant influence over the investee and which do not
have readily determinable fair values are accounted for under the cost method.
Estimates and Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Examples of estimates include: loss contingencies; product
warranties; the fair value of, and/or potential goodwill impairment for, our reporting units; product life cycles; useful lives of
our tangible and intangible assets; allowances for doubtful accounts; allowances for product returns; and stock-based
compensation forfeiture rates. Examples of assumptions include: the elements comprising a software arrangement,
including the distinction between upgrades or enhancements and new products; when technological feasibility is achieved
for our products; the potential outcome of future tax consequences of events that have been recognized in our financial
statements or tax returns; and determining when investment impairments are other-than-temporary. Actual results and
outcomes may differ from management’s estimates and assumptions.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date.
Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments
resulting from this process are recorded to Other Comprehensive Income (“OCI”).
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is probable. Revenue generally is recognized net of allowances for returns and any taxes
collected from customers and subsequently remitted to governmental authorities.
Revenue for retail packaged products, products licensed to original equipment manufacturers (“OEMs”), and perpetual
licenses under certain volume licensing programs generally is recognized as products are shipped or made available.
Revenue for products under technology guarantee programs, which provide free or significantly discounted rights to use
upcoming new versions of a software product if an end user licenses existing versions of the product during the eligibility
period, is allocated between existing product and the new product, and revenue allocated to the new product is deferred
until that version is delivered. The revenue allocation is based on vendor-specific objective evidence of fair value of the
products.
Certain 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 (“Software Assurance”) and are accounted for as
subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the billing coverage
period. Revenue from certain arrangements that allow for the use of a product or service over a period of time without
taking possession of software are also accounted for as subscriptions. Revenue for software