Microsoft 2005 Annual Report Download - page 46

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INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one to ten
years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that
warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to
amortization. No impairments of intangible assets have been identified during any of the periods presented.
RECLASSIFICATIONS
Certain previous year amounts have been reclassified to conform to the current year presentation, including the reclassification
of auction rate securities (ARS) as short-term investments instead of cash and equivalents in accordance with guidance issued
by the Securities and Exchange Commission and reclassification of non-current tax contingencies from non-current deferred
taxes to other non-current liabilities. We reclassified $1.1 billion and $1.7 billion of investments in ARS as of June 30, 2003 and
2004, respectively, that were previously included in cash and equivalents to short-term investments. We have included
purchases and sales of ARS in our statements of cash flows as a component of investing activities. To conform to our current
year presentation we have also reclassified $2.0 billion in our fiscal year 2004 balance sheet from net long-term deferred
income taxes to other long-term liabilities, with conforming reclassifications in the statement of cash flows. These
reclassifications had no impact on our results of operations or changes in stockholders’ equity, or cash flows. In addition, net
losses on equity investees and other for previous periods were reclassified to investment income and other to conform to the
current period presentation.
NOTE 2 UNEARNED REVENUE
Unearned revenue is comprised of the following items:
Volume licensing programs – Represents customer billings for multi-year licensing arrangements, paid either upfront or annually
at the beginning of each billing coverage period, which are accounted for as subscriptions with revenue recognized ratably over
the billing coverage period.
Undelivered elements – Represents free post-delivery telephone support and the right to receive unspecified
upgrades/enhancements of Microsoft Internet Explorer on a when-and-if-available basis. The amount recorded as unearned is
based on the sales price of those elements when sold separately and is recognized ratably on a straight-line basis over the
related product’s life cycle. The percentage of revenue recorded as unearned due to undelivered elements ranges from
approximately 15% to 25% of the sales price for Windows XP Home, approximately 5% to 15% of the sales price for Windows XP
Professional, and approximately 1% to 15% of the sales price for desktop applications, depending on the terms and conditions
of the license and prices of the elements. Product life cycles are currently estimated at three and one-half years for Windows
operating systems and two years for desktop applications.
Other – Represents payments for post-delivery support and consulting services to be performed in the future, online advertising
for which the advertisement has yet to be displayed, Microsoft Business Solutions maintenance and enhancement billings, Xbox
Live and other billings that are accounted for as subscriptions, and other agreements where Microsoft is committed to the
delivery of future enhancements, products, or services, including the TV platform.
The components of unearned revenue are as follows:
(In millions)
June 30 2004 2005
Volume licensing programs $ 5,075 $ 6,000
Undelivered elements 2,358
2,119
Other 744
1,048
Unearned revenue $ 8,177 $ 9,167
Unearned revenue by segment is as follows:
(In millions)
June 30 2004 2005
Clien
t
$ 2,822 $ 2,687
Server and Tools 2,370 3,048
Information Worker 2,586 2,814
Other segments 399 618
Unearned revenue $ 8,177 $ 9,167