Microsoft 2013 Annual Report Download - page 48

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Software updates that will be provided free of charge are evaluated on a case-by-case basis to determine whether they
meet the definition of an upgrade and create a multiple element arrangement, which may require revenue to be deferred
and recognized when the upgrade is delivered, or if it is determined that implied post-contract customer support (“PCS”) is
being provided, the arrangement is accounted for as a multiple element arrangement and all revenue from the
arrangement is deferred and recognized over the implied PCS term when the VSOE of fair value does not exist. If updates
are determined to not meet the definition of an upgrade, revenue is generally recognized as products are shipped or made
available. Windows 8.1 will enable new hardware, further the integration with other Microsoft services and fix some of the
customer issues with Windows 8, and will be provided to Windows 8 customers when available at no additional
charge. We evaluated Windows 8.1 and determined that it did not meet the definition of an upgrade and thus have not
deferred revenue related to this planned release.
Certain volume licensing arrangements include a perpetual license for current products combined with rights to receive
unspecified future versions of software products (“Software Assurance”), which we have determined are additional
software products and are therefore accounted for as subscriptions, with billings recorded as unearned revenue and
recognized as revenue ratably over the coverage period. Arrangements that include term based licenses for current
products with the right to use unspecified future versions of the software during the coverage period, are also accounted
for as subscriptions, with revenue recognized ratably over the coverage period.
Revenue from cloud-based services arrangements that allow for the use of a hosted software product or service over a
contractually determined period of time without taking possession of software are accounted for as subscriptions with
billings recorded as unearned revenue and recognized as revenue ratably over the coverage period beginning on the date
the service is made available to customers. Revenue from cloud-based services arrangements that are provided on a
consumption basis (for example, the amount of storage used in a particular period) is recognized commensurate with the
customer utilization of such resources.
Some volume licensing arrangements include time-based subscriptions for cloud-based services and software offerings
that are accounted for as subscriptions. These arrangements are considered multiple element arrangements. However,
because all elements are accounted for as subscriptions and have the same coverage period and delivery pattern, they
have the same revenue recognition timing.
Revenue related to Surface, our Xbox 360 gaming and entertainment console, Kinect for Xbox 360, games published by
us, and other hardware components is generally recognized when ownership is transferred to the resellers or end
customers when selling directly through Microsoft Stores. Revenue related to games published by third parties for use on
the Xbox 360 platform is recognized when games are manufactured by the game publishers.
Display advertising revenue is recognized as advertisements are displayed. Search advertising revenue is recognized
when the ad appears in the search results or when the action necessary to earn the revenue has been completed.
Consulting services revenue is recognized as services are rendered, generally based on the negotiated hourly rate in the
consulting arrangement and the number of hours worked during the period. Consulting revenue for fixed-price services
arrangements is recognized as services are provided. Revenue from prepaid points redeemable for the purchase of
software or services is recognized upon redemption of the points and delivery of the software or services.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs
related to product support service centers and product distribution centers; costs incurred to include software on PCs sold
by OEMs, to drive traffic to our websites, and to acquire online advertising space (“traffic acquisition costs”); costs
incurred to support and maintain Internet-based products and services, including datacenter costs and royalties; warranty
costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of
capitalized research and development costs. Capitalized research and development costs are amortized over the
estimated lives of the products.