Microsoft 2012 Annual Report Download - page 48

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when
they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on
valuation techniques using the best information available, and may include quoted market prices, market comparables,
and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair
value and this condition is determined to be other-than-temporary.
Our other current financial assets and our current financial liabilities have fair values that approximate their carrying
values.
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 values of these investments approximate their carrying values. 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 increase investment returns. The loaned securities continue to be
carried as investments on our balance sheet. Cash and/or security interests are received as collateral for the loaned
securities with the amount determined based upon the underlying security lent and the creditworthiness of the borrower.
Cash received 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. Fair value is
calculated based on publicly available market information or other estimates determined by management. 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.
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.
For derivative instruments designated as fair-value hedges, the gain (loss) is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged items attributed to the risk being hedged. For options
designated as fair-value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and
are recognized in earnings.