Microsoft 2006 Annual Report Download - page 49

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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, using the average cost method. Cost includes materials, labor, and
manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on
hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a
reduction in utility below carrying value, we reduce our inventory to a new cost basis.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated life of
the asset or the lease term, ranging from one to 15 years. Computer software developed or obtained for internal use is
depreciated using the straight-line method over the estimated useful life of the software, generally three years or less.
GOODWILL
Goodwill is tested for impairment on an annual basis as of July 1, and between annual tests if indicators of potential impairment
exist, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented.
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.
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 were as follows:
(In millions)
June 30
2006
2005
Volume licensing programs $ 7,66
1
$6,000
Undelivered elements 2,066
2,119
Other 1,175
1,048
Unearned revenue $10,902 $9,167