Microsoft 2013 Annual Report Download - page 31

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We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. Our gross
exposures to our customers and investments in Portugal, Italy, Ireland, Greece, and Spain are individually and collectively
not material.
Of the cash, cash equivalents, and short-term investments at June 30, 2013, approximately $69.6 billion was held by our
foreign subsidiaries and would be subject to material repatriation tax effects. The amount of cash, cash equivalents, and
short-term investments held by foreign subsidiaries subject to other restrictions on the free flow of funds (primarily
currency and other local regulatory) was approximately $880 million. As of June 30, 2013, approximately 87% of the cash
equivalents and short-term investments held by our foreign subsidiaries were invested in U.S. government and agency
securities, approximately 4% were invested in corporate notes and bonds of U.S. companies, and 2% were invested in
U.S. mortgage-backed securities, all of which are denominated in U.S. dollars.
Securities lending
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. Our securities lending payable balance was $645
million as of June 30, 2013. Our average and maximum securities lending payable balances for the fiscal year were $494
million and $1.4 billion, respectively. Intra-year variances in the amount of securities loaned are mainly due to fluctuations
in the demand for the securities.
Valuation
In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the
fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as exchange-
traded mutual funds, domestic and international equities, and U.S. government securities. If quoted prices in active
markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar
assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. This pricing
methodology applies to our Level 2 investments such as corporate notes and bonds, foreign government bonds,
mortgage-backed securities, and U.S. agency securities. Level 3 investments are valued using internally developed
models with unobservable inputs. Assets and liabilities measured using unobservable inputs are an immaterial portion of
our portfolio.
A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as these
vendors either provide a quoted market price in an active market or use observable inputs for their pricing without
applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the investment is not
priced by our pricing vendors, or when a broker price is more reflective of fair values in the market in which the investment
trades. Our broker-priced investments are generally classified as Level 2 investments because the broker prices these
investments based on similar assets without applying significant adjustments. In addition, all of our broker-priced
investments have a sufficient level of trading volume to demonstrate that the fair values used are appropriate for these
investments. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded.
These controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and
independent recalculation of prices where appropriate.
Cash Flows
Fiscal year 2013 compared with fiscal year 2012
Cash flows from operations decreased $2.8 billion during the current fiscal year to $28.8 billion, due mainly to changes in
working capital, including increases in inventory and other current assets. Cash used for financing decreased $1.3 billion
to $8.1 billion, due mainly to a $3.5 billion increase in proceeds from issuances of debt, net of